The case of the day is Belmont Partners, LLC v. Mina Mar Group, Inc. (W.D. Va. 2010). It’s a perfect example of what should not happen in arbitration–the parties agreed to arbitrate, then settled, then one reneged on the settlement, then they sued each other in two countries.
The parties were both in the business of buying and selling “clean shell corporations.” These are corporations with “no sales, no liabilities, and no assets.” The idea, according to Mina Mar, is that the shares of “clean shell” companies “can be readily traded and private operating companies can merge with [them] and ‘go public.’” I have no comment on the propriety of this business!
Belmont contracted to sell Mina Mar the stock of three clean shell corporations. The contract contained an arbitration clause. Because Belmont was an American company and Mina Mar a Canadian company, the arbitration agreement was within the scope of the New York Convention. After alleged breaches of the contract, the parties engaged in arbitration (the seat of the arbitration was in Virginia) and, before the arbitration concluded, reached a settlement agreement obligating Mina Mar to “return all interests in [one of the clean shell companies] to Belmont.” But Mina Mar refused to perform until Belmont transferred stock in the other two companies to it, claiming that Belmont had agreed to make the transfers in a series of communications not contained in the settlement agreement. Belmont asked the arbitrator to enter an award enforcing the settlement, and the arbitrator obliged, finding that Mina Mar was obliged to transfer shares to Belmont and that Belmont had no further obligation to Mina Mar.
Somewhat bizzarely, given that it would seek to vacate the award in the U.S. District Court in Virginia, Mina Mar moved to confirm the award in the Ontario Superior Court. Mina Mar also asked the Ontario court to stay enforcement of the award and to “vary” the award (to modify it, I suppose), to require Belmont to transfer the shares of stock to Mira Mar before Mira Mar would be obligated to comply with the award. The Ontario court confirmed the award, but denied Mira Mar’s other motions. It is difficult to understand why Mira Mar sought confirmation if it was not prepared to perform, but there it is.
In Virginia, Belmont sought to confirm the award, and Mina Mar again sought to modify it, as well as to vacate it. The judge held that the Ontario decision was entitled to comity, and that having recognized the Ontario judgment, the court was required to give it claim preclusive effect. The court also held that Belmont would have been entitled to confirmation even without giving preclusive effect to the Ontario judgment, but it is the question of preclusion that makes the case interesting, and that we’ll focus on here.
Claim preclusion requires a finding that the cause of action in the first suit is identical to the cause of action in the later suit. In the Ontario suit, Mina Mar sought to confirm the award and also to “vary” the award to impose obligations on Belmont that were not included in the award. The Ontario court held that it lacked authority to modify the award under Ontario law, and that Mina Mar’s “recourse would be to the superior court in Virginia and not Ontario, since the arbitration proceeded in Virginia.” While the Ontario court did not phrase its judgment in this way, I think it is best read as a recognition that under the Convention, the courts in the state where recognition and enforcement are sought can refuse recognition and enforcement only on the limited grounds outlined in Article V, and that only the courts in Virginia could consider whether the award should be set aside under US law. (That’s not to say that a court in Virginia has the power to modify the award, but if any court has that power, it’s the court at the seat of the arbitration).
If we view the Ontario decision this way, I don’t think the Virginia court was right to say that the Ontario decision had claim preclusive effect. The Ontario court’s decision rested in part on the grounds that only the courts of Virginia could adjudicate claims that the award should be set aside. That decision can’t have res judicata effect in Virginia, it seems to me. The Ontario court also considered its powers under Ontario law, while the Virginia court had to consider whether the award had been procured by “fraud or undue means” so as to justify vacatur under § 10 of the FAA. That’s not to say the case was wrongly decided: the court found no fraud or undue means on the merits. But I do think it’s a mistake to think that a decision refusing recognition and enforcement in a foreign jurisdiction can be res judicata as to a petition to vacate the award.
It’s useful to compare this case with International Trading v. DynCorp, the case of the day from January 26. There, the US court, asked to confirm a French award, had to consider whether a Qatari court’s decision purporting to vacate the award should be given preclusive effect. The court held that it should not, because only the French court had the power to vacate the award. In Belmont v. Mina Mar, on the other hand, the US court, asked to vacate a US award, had to consider whether a Canadian court’s decision confirming the award should be given preclusive effect. I think the correct answer is as I’ve indicated above–no, because the Canadian court could not have vacated the award, and thus the claims were not identical in the two cases.
UPDATE: Note that there was no jurisdictional issue in this case, as there was in the Ingaseosas case, because here the motion to confirm was filed first, and the motion to vacate was a counterclaim.