S.D.N.Y. Clarifies that U.S Courts Lack Jurisdiction to Vacate Foreign Awards

In  Molecular Dynamics, Ltd., SDBM Limited, & Chauncey Capital Corp. v. Spectrum Dynamics Medical Limited & Biosensors International Group Ltd., No. 22-5167, 2024 WL 3523414 (S.D.N.Y. July 23, 2024), the U.S. District Court for the Southern District of New York refused to vacate a Swiss arbitration award, finding that federal courts lack jurisdiction to vacate the award.

U.S. courts generally do not possess subject matter jurisdiction to vacate foreign arbitral awards. This principle is grounded in international arbitration law and practice, which typically confers the authority to annul or vacate an arbitral award on the courts of the country where the arbitration took place or under whose laws the arbitration was conducted. This approach aligns with the doctrine of territoriality in arbitration, ensuring that the legal framework and judicial oversight of the arbitration process are consistent with the local laws and procedures governing the arbitration.

The Molecular Dynamics court explained that under the New York Convention, a “competent authority” in a country under the laws of which the award is “made” “is said to have primary jurisdiction over the arbitration award," meaning that the state in which, or under the law of which, an award is made, will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief. Under the New York Convention, all other signatory states become secondary jurisdictions, where "parties can only contest whether that State should enforce the arbitral award." Thus, under the New York Convention, courts in countries with secondary jurisdiction may only decline to enforce an arbitral award, and do so based “only on the limited grounds specified in Article V [of the New York Convention].” This is implemented in the Federal Arbitration Act in Section 207.

The Southern District opened its analysis of respondents' argument that it lacks subject matter jurisdiction to vacate the award by recognizing that the Second Circuit has held in Zeiler v. Deitsch, 500 F.3d 157, 165 n.6 (2d Cir. 2007), that “[n]either the [New York] Convention nor its enabling statute, 9 U.S.C. §§ 201-08, grant[s vacatur] power with regard to [awards governed by the New York Convention].” The Seventh and Eleventh Circuits have similar holdings. The Court explained:

Under the New York Convention, only a “competent authority” of the country in which, or under the law of which, an award was made, may vacate or annul the award under domestic law. See N.Y. Conv., art. V(1)(e). Thus, while “courts of a primary jurisdiction may apply their own domestic law” — such as the FAA — “when evaluating an attempt to annul or set aside an arbitral award,” “courts in countries of secondary jurisdiction may refuse enforcement only on the limited grounds specified in Article V.”

The Court then found that Switzerland was the primary jurisdiction in this case because the Arbitration was seated in Switzerland and governed by Swiss law, both procedurally and substantively. The Court rejected petitioners' argument that the United States is the primary jurisdiction because the forum selection clause in an underlying agreement confers jurisdiction to vacate the Swiss awards in U.S. courts. That clause stated that "the seat of the [arbitration] shall be Geneva Switzerland,” and that “on matters concerning the [arbitration], the courts of New York, New York will have exclusive jurisdiction thereupon.” Nevertheless, the Court was not persuaded that this is a proper way to circumvent the New York Convention. Indeed, the Court found that this reading of the forum selection clause contravenes the New York Convention which reserves the power to vacate foreign awards to courts sitting in primary jurisdiction alone. The Court explained that it is not within the parties' power to "expand[] the powers of a court beyond the confines set by the New York Convention," "as there is a 'basic difference between the court's power and the litigant's convenience,' and no contract can convey to the court the 'power to adjudicate' matters which it otherwise could not."

The rationale behind limiting the jurisdiction to vacate arbitral awards to the courts of the seat of arbitration is to maintain coherence and predictability in the arbitration process. When parties choose a specific jurisdiction for arbitration, they implicitly accept the legal and procedural standards of that jurisdiction, including the grounds and procedures for challenging the award. Allowing U.S. courts to vacate foreign arbitral awards would create a risk of conflicting decisions and undermine the stability of the international arbitration system. Instead, U.S. courts focus on the recognition and enforcement of foreign arbitral awards under frameworks such as the New York Convention, which provides a uniform standard for enforcing awards while respecting the jurisdictional boundaries.

In practice, U.S. courts can refuse to enforce a foreign arbitral award on limited grounds, such as if the award violates public policy or if due process was not observed during the arbitration. However, these are exceptions rather than the norm, and they do not equate to a broad authority to vacate the award. By adhering to this jurisdictional limitation, U.S. courts contribute to the global predictability and reliability of the arbitration process, fostering an environment where international parties can resolve disputes with confidence that the agreed-upon legal framework will be respected and enforced.

Navigating the Maze: Jurisdiction in Cross-Border Enforcement Cases

When it comes to enforcing judgments or resolving disputes involving parties from different jurisdictions, one of the key challenges is determining where legal proceedings should take place. Jurisdiction in cross-border enforcement cases is a complex and multifaceted issue, influenced by a variety of factors including legal principles, international treaties, and practical considerations. In this article, we'll explore the intricacies of jurisdiction in cross-border enforcement cases and the challenges it presents to parties seeking to enforce their rights across borders.

Understanding Jurisdiction in Cross-Border Cases

Jurisdiction refers to the authority of a court to hear and decide a case. In cross-border enforcement cases, jurisdictional issues arise when parties from different countries are involved in a legal dispute or when the enforcement of a judgment or arbitration award extends beyond the borders of a single jurisdiction. Determining the appropriate jurisdiction in such cases involves considering various factors, including:

1. Subject Matter Jurisdiction: This refers to the court's authority to hear cases of a particular type or subject matter. In cross-border enforcement cases, the court must have jurisdiction over the subject matter of the dispute, which may involve issues such as contract law, torts, or intellectual property rights.

2. Personal Jurisdiction: Also known as "jurisdiction over the person," this refers to the court's authority to adjudicate the rights and obligations of the parties involved. Personal jurisdiction is often determined based on factors such as the defendant's presence or activities within the jurisdiction, consent to jurisdiction, or the effects of the defendant's actions within the jurisdiction.

3. In Rem Jurisdiction: This refers to the geographical boundaries within which a court has authority to hear cases. In cross-border enforcement cases, questions may arise regarding whether a court in one jurisdiction has the authority to enforce judgments or orders against assets located in another jurisdiction.

4. Forum Selection Clauses: Parties may agree in advance to submit to the jurisdiction of a particular court or to resolve disputes through arbitration. Forum selection clauses are commonly included in contracts and can significantly impact jurisdictional issues in cross-border enforcement cases.
   

Jurisdictional Challenges in Cross-Border Enforcement Cases

Navigating jurisdictional issues in cross-border enforcement cases can be fraught with challenges due to the diverse legal systems, conflicting laws, and procedural complexities involved. Some of the key challenges include:

1. Conflicting Jurisdictional Rules: Different countries have their own rules and principles governing jurisdiction, leading to potential conflicts when parties from multiple jurisdictions are involved in a dispute. Determining which jurisdiction's laws apply and which court has authority to hear the case can be contentious and may require careful analysis of applicable legal principles and international treaties.

2. Enforcement of Foreign Judgments: Even if a judgment is obtained in one jurisdiction, enforcing it in another jurisdiction can be challenging. The principles of comity and reciprocity govern the recognition and enforcement of foreign judgments, but each jurisdiction may have its own procedures and requirements for recognition and enforcement.

3. Lack of Uniformity: The lack of uniformity in jurisdictional rules and procedures across jurisdictions can create uncertainty and unpredictability for parties involved in cross-border enforcement cases. Harmonizing jurisdictional rules and promoting international cooperation are essential for addressing this challenge and facilitating the enforcement of judgments across borders.

4. Jurisdictional Disputes: Jurisdictional disputes between parties can prolong legal proceedings and increase costs. Parties may engage in "forum shopping" to seek a jurisdiction favorable to their interests or challenge the jurisdiction of a court in an attempt to delay or thwart enforcement efforts.
   

Although lack of personal jurisdiction is not one of the seven grounds on which confirmation may be denied under the New York Convention, U.S. courts have held that "dismissal of a petition under the New York Convention for lack of personal jurisdiction is appropriate as a matter of constitutional due process." See First Inv. Corp. of Marshall Islands v. Fujian Mawei Shipbuilding, Ltd., 703 F.3d 742, 748 (5th Cir. 2012), as revised (Jan. 17, 2013). "Because the New York Convention, through its implementing legislation, is an exercise of presidential and congressional power, whereas personal jurisdiction is grounded in constitutional due process concerns, there can be no question that the Constitution takes precedence." Id. at 749-750; see also Frontera Res. Azer. Corp. v. State Oil Co. of Azer. Rep., 582 F.3d 393, 397–98 (2d Cir.2009) (confirmation proceeding under New York Convention requires personal or quasi in rem jurisdiction over parties); Telcordia Tech Inc. v. Telkom SA Ltd., 458 F.3d 172, 178–79 (3d Cir.2006) (observing that “the New York Convention does not diminish the Due Process constraints in asserting jurisdiction over a nonresident alien”); Base Metal Trading, Ltd. v. OJSC “Novokuznetsky Aluminum Factory”, 283 F.3d 208, 212 (4th Cir.2002) (“[W]hile the [New York] Convention confers subject matter jurisdiction over actions brought pursuant to the Convention, it does not confer personal jurisdiction when it would not otherwise exist.”).

Once a defendant raises a personal jurisdictional defense, the “plaintiff bears the burden of proving by affidavits or other competent evidence that jurisdiction is proper. Permissible evidence to meet this burden must be more than an 'unverified complaint,' or bare allegations made 'upon information and belief.'" Simplot India LLC v. Himalaya Food Int'l Ltd., 2024 WL 1136791, at *4 (D.N.J. Mar. 15, 2024) (internal citations omitted). The District of New Jersey's opinion in Simplot comprehensively summarizes most common arguments for finding personal jurisdiction over a foreign entity in the context of a petition to confirm an arbitration award under the New York Convention.

The Alter Ego Theory of Personal Jurisdiction

"The contacts of a defendant company's alter ego may, under some circumstances, be treated as the defendant's contacts for the purposes of personal jurisdiction." Simplot, 2024 WL 1136791, at *5. In Simplot, the District of New Jersey refused to find that petitioners seeking to confirm an arbitration award established that the court had jurisdiction over the respondent because respondent had an alter ego operating in New Jersey. The court pointed out that U.S. courts usually start from a presumption of corporate separation between a parent company and its subsidiary, and respondents did not meet their burden to show that "[r]espondent exercises such 'complete domination' of finances, policy, and business practice over" the New Jersey entity. Id. at 6. Some jurisdictions, such as New Jersey, also require "some showing of fraud or injustice that would result in the absence of veil-piercing." Id. at 9. Petitioners in Simplot failed to show that as well.

Registration to Do Business in the State

The Simplot court also failed to find persuasive in this case the fact that respondents had registered to do business in New Jersey. Id. The court explained that "[w]hether corporate registration constitutes consent turns on the text of the state's registration statute." Id. In Pennsylvania, for example, "the statutory provision explicitly stating that qualification as a foreign corporation subjected the corporation to personal jurisdiction in the state or the provision explicitly listing 'consent' as a basis for jurisdiction supported a finding of personal jurisdiction over the corporate defendant." Id. Unfortunately for petitioners in Simplot, the New Jersey statute did not. Id.

Quasi In Rem Jurisdiction

The Simplot court also provided an overview of quasi in rem jurisdiction. The court explained that the U.S. "Supreme Court laid out the basics of the doctrine in Shaffer v. Heitner, 433 U.S. 186 (1977). A quasi in rem judgment 'affects the interests of particular persons in designated property,' including when a 'plaintiff seeks to apply what he concedes to be the property of the defendant to the satisfaction of a claim against him.'” Id. at *11. The rationale for quasi in rem jursidiction is that “a wrongdoer ‘should not be able to avoid payment of his obligations by the expedient of removing his assets to a place where he is not subject to an in personam suit.’ ” Id. The court noticed that cases applying this doctrine are rare, and viewed this as a warning that its application requires a careful approach. Id. Specifically, the court cautioned that this doctrine should apply only in cases where "the respondent's interest in the property that serves as the jurisdictional hook is clear." Id. The court contrasted those cases to the matter at hand where, per the court, respondents' interest in the assets -- held in the subsidiary's bank account in New Jersey -- was at best speculative, based on the fact that Respondents ship frozen food to the subsidiary, meaning that the subsidiary owe payments to Respondents.

The Case for Integrating Asset Recovery in Legal Education

In 2011, David Quinones wrote an article for the now-defunct International Association for Asset Recovery titled “Asset Recovery: They Don’t Teach This Stuff in College. Or Do They?”  The article showcased a “groundbreaking class” taught at George Washington University entitled “International Money Laundering, Corruption, and Terrorism,” which also provided an overview of Asset Recovery.  The class, taught by Jack Smith–an accomplished government lawyer who headed the legal department of three U.S. federal agencies–and Tom Lasich–a former director of training at the prestigious Basel Institute on Governance’s International Centre for Asset Recovery–was one of the few classes providing law students with the tools to understand asset recovery and the practical realities of the field.  

Asset Recovery: An Unexplored Topic in Legal Education

More than 10 years later, Smith and Lasich’s class continues to be a rarity in legal education, despite the fact that the field of asset recovery has emerged as a critical area of practice. Whether stemming from financial crimes, corruption, or fraudulent activities, the recovery of assets plays a pivotal role in upholding the rule of law, combating illicit activities, and restoring justice to victims. 

The past few years saw an increase in training opportunities available to established practitioners.  Smith and Lasich built out their computer-based asset recovery exercise to offer international workshops and training sessions on the same topic through the Repatriation Group, and a soon-to-be launched video game: “Follow the Money.”  Professionals can access post-graduate training internationally, including through the Basel Institute’s training opportunities, Queen Mary University of London’s International Asset Tracing and Recovery Course (taught on three consecutive Tuesdays every November in London by practitioners, including Gary Miller of Mishcon de Reya), OPDAT’s Anticorruption and Asset Recovery course in Hungary for senior criminal justice professionals, opportunities to study asset recovery in law school remain rare. 

At a JD-level in the United States, the American University’s Washington College of Law’s Anti-Corruption Summer Law Program gives their students the opportunity to study asset recovery as a tool for combating corruption. Otherwise, some basic concepts of judgment enforcement and asset recovery are sometimes taught as part of conflicts of law classes (for example, at American and UVA), or as part of insolvency-focused courses (for example, at Washburn Law School). 

Bridging the Gap: The Need for Asset Recovery Education

In recent years, there has been a growing recognition of the importance of asset recovery in the global fight against financial crime and corruption. Governments, international organizations, and civil society have intensified efforts to recover stolen assets and hold perpetrators accountable. Further growth has been caused by an increase in distressed or non-performing assets, most famously including defaulted-on sovereign debt instruments.  However, the effectiveness of asset recovery efforts often hinges on the availability of skilled professionals with expertise in this specialized field. Litigation and prosecution, without perspective on whether a remedy can be obtained, is simply firing blanks.

Law schools play a pivotal role in preparing the next generation of legal practitioners to address the complex challenges associated with asset recovery. By integrating asset recovery education into their curricula, law schools can bridge the gap between theoretical knowledge and practical skills, equipping students with the tools and insights needed to navigate this multifaceted domain. 

Smith and Lasich’s class is a prime example of how law schools can creatively teach asset recovery in a way that combines theoretical knowledge and practical skills.  The 2011 article explained that “[t]he class devote[d] a five week chunk to a theoretical case study. Students [we]re given fact patterns and allowed to let the case develop, while Smith and Lasich toss real-life curveballs like uncooperative entities and lack of political will into the equation. Students gather[ed] 55 pieces of evidence and [we]re called upon to analyze spreadsheets, statements and multiple other documents. The students make all their own decisions, receiving only general guidance from the professors.”  

Asset recovery thus represents a great opportunity for law schools to build a course that would help students apply many theoretical concepts studied and practice their legal skills on real-world scenarios, including legal research, analysis, drafting, negotiations, and advocacy.  Students can research the laws related to executing on judgments or obtaining prejudgment attachments, develop an understanding of sovereign immunity, draft Section 1782 petitions in aid of foreign proceedings, and learn to understand and see through corporate structures meant to obscure ownership.  

A comprehensive asset recovery curriculum would also promote interdisciplinary learning, giving law students a peek into the world of finance, accounting, investigations and international relations.  Teaching asset recovery in law schools can encourage students to engage with global legal frameworks, international treaties, and cross-border legal issues, preparing them for a career in an interconnected world.

Practical Approaches to Teaching Asset Recovery

Integrating asset recovery into law school curricula can take various forms, including dedicated courses, seminars, workshops, and experiential learning opportunities. In addition to developing specialized courses or modules focused on asset recovery and touching on topics such as asset tracing, forfeiture proceedings, restitution, recovery mechanisms, and international cooperation, law schools can provide practical learning opportunities.

Examples of such opportunities include: (a) case studies and simulations, which would incorporate real-world case studies and simulations into coursework allows students to apply theoretical concepts to practical scenarios, honing their problem-solving skills and critical thinking abilities; (b) guest lectures and practitioner insights, which can provide students with valuable insights into the practical challenges and strategies involved in asset recovery efforts; or (c) internships, externships, or clinical programs focused on asset recovery, which can enable students to gain hands-on experience under the guidance of experienced professionals.

Teaching asset recovery in law schools is essential for preparing future legal practitioners. By integrating asset recovery education into their curricula, law schools can enhance students' legal skills, foster interdisciplinary learning, and encourage global engagement. Through practical approaches such as dedicated courses, case studies, guest lectures, and experiential learning opportunities, law schools can equip students with the knowledge, skills, and insights needed to make a meaningful impact in the field of asset recovery and contribute to the pursuit of justice and accountability on a global scale.