Tag Archives: New York Convention

Case of the Day: Agility Public Warehousing Co. v. Supreme Foodservice

U.S. military "meal ready to eat"The case of the day is Agility Public Warehousing Co. v. Supreme Foodservice GmbH (S.D.N.Y. 2011). Supreme wanted to bid on a US government contract to supply food to the troops in Afghanistan. It made a contract with Agility Public Warehousing and Professional Contract Administrators, firms that supplied food to troops in Iraq, Kuwait, and Jordan, under which APW and PCA were to provide food pricing and supply chains for use in Supreme’s bid.

Supreme won the contract in 2005, but as the war went on, the government asked Supreme to expand the scope of services and to provide food to forward operating bases. Supreme agreed, and it made a side agreement that provided for compensation for APW and PCA on account of the changed circumstances.

In 2007, Supreme learned that APW was being investigated for illegal procurement practices. APW and PCA refused to provide pricing information to Supreme, and Supreme terminated the agreement for material breach and ceased making payments—including some payments for services provided prior to the termination. APW and PCA commenced an arbitration in New York under the AAA rules, seeking the unpaid amounts, or in the alternative, seeking the contractually defined post-termination fee. While the arbitration was pending, a grand jury indicted APW for fraud. The basic allegation was that APW had misrepresented its buying power for food items in the Iraq/Kuwait/Jordan contract. Supreme then asserted, in the arbitration, that APW and PCA had fraudulently induced it to enter into the contract by “making promises that they intended to fulfill only by illegal means.” At the arbitration hearing, Supreme sought the testimony of several APW executives, but they refused to testify—though they did not formally invoke their Fifth Amendment privilege against self-incrimination. Supreme argued that the executives’ failure to testify was fatal to APW’s claims, because under New York law, where a claimant’s material witnesses invoke the Fifth Amendment, the claim should be dismissed. Supreme also asked the tribunal to infer from the refusal to testify that APW had in fact acted illegally. Finally, Supreme argued that APW could not recover, because a contract procured by fraud is unenforceable.

The tribunal awarded damages to APW and PCA, finding that they were entitled to the payments relating to the pre-termination period Supreme had refused to make, and to the reduced termination payment rather than the greater regular payments that would have been due post-termination had the termination been improper. The tribunal also dismissed Supreme’s claims for rescission and fraudulent inducement. The total damages awarded to APW and PCA were more than $38 million. The tribunal rejected the argument that the witnesses’ failure to testify was fatal to the claim, though the tribunal did draw an inference against APW that led to the conclusion that APW had materially breached the agreement.

APW and PCA moved to confirm the award. Supreme moved to vacate the award under § 10(a)(3) and (4) of the FAA, which provides:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration:
* * *
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Supreme also argued for vacatur on the grounds that the award was in manifest disregard of the law, and it opposed confirmation on the grounds that the award was contrary to public policy, which is one of the grounds for refusing confirmation permitted by the New York Convention. (That is, the public policy point is a permitted ground for refusing confirmation. Manifest disregard is highly contested and is probably not a permitted ground).

Judge Marrero confirmed the award. He held that under New York law, dismissal was not a mandatory consequence of a claimant failing to produce its material witnesses to testify. Therefore, the tribunal did not violate public policy or manifestly disregard the law by refusing to dismiss the claim on that basis. The court did not really discuss the details of the § 10(a)(3) argument, other than to make the general point that it applies only when “fundamental fairness is violated”, and not in cases of ordinary errors in the admission of evidence. [N.B. I have a case on appeal now involving the Uniform Arbitration Act’s equivalent to § 10(a)(3) and so I am not going to give a detailed discussion of my views of the statute here].

Photo credit: foam (license)

Case of the Day: Belize Social Development Ltd. v. Government of Belize

Martin Luther King, Jr.
Letters Blogatory Wishes Its Readers a Happy MLK Day!

The case of the day is Belize Social Development Ltd. v. Government of Belize (D.C. Cir. 2012).

The Contract and the Arbitration

In 2005, the Prime Minister of Belize, Said Musa of the People’s United Party, on behalf of the government, signed a contract with Belize Telemedia Ltd., under which Telemedia was going to acquire properties “in order to better accommodate the Government’s telecommunications needs”, and the government was going to give Telemedia favorable tax treatments. The contract had an arbitration agreement providing for arbitration at the LCIA. The agreement “stated that it was governed by Belize law.” In 2008, the United Democratic Party took power on a good government platform, and the new prime minister, Dean Barrow, asserted that the contract was invalid and repudiated it. Telemedia initiated an arbitration, but the government, though it received notice, did not participate in the arbitration. The tribunal issued a final award in 2009 in favor of Telemdia, awarding damages of more than 38 million Belize dollars. The government, noting that the Belize courts had already rejected the agreement’s tax provisions, rejected the award. Telemedia assigned its rights to Belize Social Development Ltd., a British Virgin Islands corporation.

The Petition to Confirm

The Attorney General of Belize sued Telemedia and BSDL in the Belize Supreme Court, seeking to prevent enforcement of the award on the grounds that it was contrary to Belize law. The court enjoined Telemedia from seeking to enforce the judgment anywhere in the world, pending the resolution of the claim. BSDL nevertheless sought to confirm the award in the District of Columbia. Belize moved to stay or dismiss the petition. BSDL did not oppose the motion, but intendmoved for a status conference and for a suspension of the scheduling order. It stated that its failure to respond to the motion to stay was not on account of an agreement that a stay was warranted but on fear of criminal sanctions for violation of the Belize court’s injunction. The district court stayed the petition to confirm pending resolution of the Belize proceedings. BSDL sought a writ of mandamus to review the stay order.

A divided panel held that the stay was improper and remanded the case for further proceedings. Mandamus is proper only if (1) there is no other adequate means of obtaining relief; (2) the petitioner shows that its right to the writ is “clear and indisputable”; and (3) the court, in its discretion, determines that the writ is “appropriate under the circumstances.” Writing for herself and Judge Garland, Judge Rodgers noted that there was no alternate means of relief, since the stay is not a final order and thus is not appealable under 28 U.S.C. § 1291. Although the order might have been appealable under the collateral order doctrine, the panel, “mindful of the advantage of limiting the use of appellate recourse in response to stay orders,” treated the proceeding as a petition for mandamus rather than an appeal.

Turning to the merits, Judge Rodgers found that BSDL’s claim was clearly meritorious, because the stay was contrary to the New York Convention. Article VI of the Convention provides:

If an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V(1)(e), the authority before which the award is sought to be relied may, if it considers it proper, adjourn the decision on the enforcement of an award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security

Article V(1)(e) refers to “a competent authority of the country in which, or under the law of which, that award was made.” So Article VI permits a stay when there has been an application for a stay before the courts of the country “under the law of which” the award was made. Belize asserted that because the contract provided that it was governed by Belize law, the proceedings in Belize satisfied the conditions of Article VI. But this is plainly wrong—the reference to the law under which the award is made is a reference to the law that governed the arbitration, not the law that governed the substance of the dispute. The arbitration took place in London and (in the absence of an agreement to the contrary) was governed by the law of England and Wales. So the district court had violated its “virtually unflagging obligation … to exercise the jurisdiction given [to it].” The panel also found that the stay was “immoderate” because it was indefinite in duration.

Judge Kavanaugh dissented. But he did not really assert that the district court’s decision was substantively correct, but only that that case was not sufficiently extraordinary to warrant mandamus relief.

The Comparison With The Chevron/Ecuador Case

I can’t help but think of Judge Kaplan’s now-vacated anti-suit injunction in the Chevron/Ecuador case, which, like the Belize injunction here, purported to enjoin proceedings for recognition and enforcement anywhere in the world, even though the judgment was not a US judgment (just as the award here was not made in Belize). Obviously we can’t make too much of the comparison, because the New York Convention applies in this case but not in Chevron/Ecuador. But it strikes me that watching the courts in another country enjoin litigation in the United States to enforce a judgment made in a third country helps us to understand why such an injunction doesn’t sufficiently respect the comity concerns at stake.

Follow-on litigation

There is an interesting coda to all of this. When the UDP came to power, the government, which was a significant shareholder, sought to remove some of Telemedia’s directors. The dispute went all the way to the Privy Council, resulting in Attorney General of Belize v. Belize Telcom Ltd., [2009] UKPC 10.

Case of the Day: Nomanbhoy v. Vahanvaty

The case of the day is Nomanbhoy v. Vahanvaty (N.D. Ill. 2011). Sabbhir Nomanbhoy was a shareholder and CEO of Dyna Care Health Ventures, which provided home nursing services in several states. His relatives, Aymen Tyebjee, Nafeesa Moosabhoy, Yunus Nomanbhoy, and Zehra Vahanvaty, were also involved in the business.The family, all US citizens, were members of the Dawoodi Bohra sect of Shi’ite Islam. An intra-family dispute arose, which resulted in Sabbhir’s removal as CEO. Sabbhir and Tyebjee, his sibling and antagonist, met with their religious leader, Shehzada Qaid Johar Bhaisheb, in California in an attempt to resolve their dispute. The attempt was unsuccessful, and Shehzada Qaid asked the parties to come to London to try again. Another religious leader, Shehzada Mufaddal BS Saifuddin Saheb, successfully helped the parties resolve their dispute. They executed a written settlement agreement, which provided for a hisab, a settlement of accounts, and further provided for arbitration by Shehzada Mufaddal if the parties could not settle the accounts on their own. When the parties could not agree on the accounting, they arbitrated the issue before Shehzada Mufaddal in Sri Lanka. Shehzada rendered an award in 2008. In 2011, Sabbhir Nomanbhoy sought confirmation in Chicago. The relatives asserted that the court lacked subject-matter jurisdiction and moved to dismiss.

Under § 202 of the FAA, a foreign arbitral award does not fall under the New York Convention if it arises out of a relationship that is “entirely between citizens of the United States,” unless the relationship “involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”

The judge found that the parties’ relationship lacked a relation with a foreign state. The parties had signed a settlement agreement in England, but not because their dispute had any relationship with England, but only to accommodate Shehzada Mufaddal’s travel schedule. The parties envisaged performance of the hisab in the United States. There is authority for the view that despite the plain language of § 202, any award made in a foreign country is within the scope of the statute; but no party raised these precedents, and the argument was therefore waived.

If the outcome of this case is correct, is the result that an award in a dispute between American citizens without a tie to a foreign state cannot be confirmed if the parties happen to conduct their arbitration in a foreign state? No—it simply means that Chapter 2 of the FAA does not vest the District Courts with jurisdiction to hear such cases. The District Courts may have an independent basis for jurisdiction (e.g., diversity of citizenship), and even if there is no federal jurisdiction, a party could seek confirmation of the award in a state court.