In matter of first impression, Fifth Circuit sides with
other Circuits in finding that a court may dismiss a petition to confirm a
foreign arbitration award for lack of personal jurisdiction
In the following case, the U.S.
Fifth Circuit decides, as a matter of first impression in that Circuit, whether
a court may dismiss a petition to confirm a foreign arbitration award for lack
of personal jurisdiction under the United Nations Convention on the Recognition
and Enforcement of Foreign Arbitral Awards [21 UST 2517; TIAS 6997; 330 UNTS 3
(in eff. for U.S. 12/29/70)] [herein generally referred to as the New York
Convention].
In 2003, First Investment
Corporation of the Marshall Islands (First Investment) entered into a series of
shipbuilding contracts with two Chinese companies, Fujian Shipbuilding Industry
Group Corp. (FSIGC) (state owned) and Fujian Mawei Shipbuilding Ltd. (Mawei)
(private company with FSIGC as a majority shareholder) (collectively the
“Fujian Entities”). The relationship soured soon, and First Investment claimed
that the Fujian Entities refused to honor an option agreement.
First Investment requested arbitration
pursuant to the contractual arbitration clause in May 2004, and an arbitration
panel was established in June 2004 pursuant to the rules of the London Maritime
Arbitration Association. First Investment appointed Bruce Harris to the panel,
the Fujian Entities appointed Wang Sheng Chang. Harris and Wang then selected
Professor Martin Hunter as the third arbitrator.
At the end of the arbitration in
September 2005, the arbitrators prepared a draft award in First Investment’s
favor. In February 2006, Wang sent comments and a dissent. In March 2006,
Hunter sent a second draft to which Wang never responded because he had been
arrested by Chinese police on charges of bribery and secret sales of
state-owned assets. Hunter and Harris issued the award and attached Wang’s
dissent. The award granted First Investment about $26 million in damages.
First Investment’s attempts to
enforce the arbitration award in China were unsuccessful. The Xiamen Maritime
Court in Fujian Province allegedly barred First Investment’s counsel from
attending a court hearing, and assigned a court interpreter with very limited
experience. The Chinese Consulates in London and Athens allegedly refused to
authenticate necessary documents. In May 2008, the Chinese court denied the
enforcement of the arbitration award because the panel’s third arbitrator did
not approve the final draft of the award.
In 2009, First Investment filed
its second enforcement case, this time in the U.S. District Court for the
Eastern District of Louisiana, naming the Fujian Entities and the People’s
Republic of China (PRC) as Respondents. After an initial default judgment, the
District Court vacated the default and granted the Fujian Entities motion to
dismiss for lack of personal jurisdiction. The District Court also dismissed
First Investment’s petition against the PRC for lack of subject matter
jurisdiction. First Investment appealed.
The U.S. Court of Appeals for the
Fifth Circuit affirms. It rules that the district court had properly dismissed
the petition for lack of personal jurisdiction. The PRC was properly dismissed
for lack of subject matter jurisdiction.
The Court first reviews the
District Court’s dismissal of the Fujian Entities for lack of personal
jurisdiction, addressing First Investment’s three sub-arguments. “… First
Investment argues that the Fujian Entities, as foreign entities with no
contacts in the United States, were not entitled to the protections of the
Fifth Amendment’s Due Process Clause. First Investment further asserts that
personal jurisdiction is not a valid defense under the New York Convention.
Finally, First Investment argues that, because the Fujian Entities were alter
egos of the PRC, a foreign state over which U.S. Courts did not have to have
personal jurisdiction the district court had erred in dismissing the Fujian
Entities. […].”
“First Investment argues that
foreign entities that are neither present nor have property in the United
States are not entitled to due process protections. We find no support for this
proposition in current caselaw. The decisions First Investment relies on are
clarified by later circuit decisions or are superseded by the U.S. Supreme
Court’s recent decision in Goodyear Dunlop Tires Operations, S.A. v. Brown, 131
S. Ct. 2846 (2011).” […]
“The Goodyear Court addressed
whether ‘foreign subsidiaries of a United States parent corporation [are]
amenable to suit in state court on claims unrelated to any activity of the
subsidiaries in the forum State[.]’ 131 S. Ct. at 2850. The Court held that
because the district court lacked both specific and general jurisdiction, the
court could not exercise personal jurisdiction over the subsidiaries. Id. at
2851. By engaging in a minimum contacts analysis where the foreign entities
were not registered in the forum state, did not solicit business there, and did
not design, manufacture, or advertise products in the forum state, the Court
made clear that such foreign corporations could avail themselves of the
protections of the Due Process Clause. Id. at 2852-54 …”
“Thus, there is no basis to
conclude that a party’s status as a foreign entity permits a court to ignore
personal jurisdiction or exercise such jurisdiction without first establishing
sufficient contacts between the defendant and the forum state.” [Slip op. 5-7]
The Court then addresses the issue
of first impression, whether a court may dismiss a petition to confirm a
foreign arbitration award for lack of personal jurisdiction. “First Investment
next argues that a party against whom confirmation of a foreign arbitral award
is sought under the New York Convention cannot raise a personal jurisdiction
defense. First Investment points out that the New York Convention expressly
provides for seven grounds on which confirmation may be denied and that
personal jurisdiction is not among the listed grounds. First Investment further
observes that an action to confirm an award under the New York Convention is a
summary proceeding that does not impact a defending party’s rights and thus it
is unnecessary for a court to have personal jurisdiction.”
“We have previously declined to
rule on whether dismissal of a confirmation action would be proper on personal
jurisdiction grounds. Gulf Petro Trading Co. v. Nigerian Nat’l Petrol. Corp.,
512 F.3d 742, 753 (5th Cir. 2008) (King, J.). With the question squarely before
us, we hold, in accordance with the decision of every circuit to have
considered this issue, that dismissal of a petition under the New York
Convention for lack of personal jurisdiction is appropriate as a matter of constitutional
due process.”
“‘The New York Convention provides
a carefully structured framework for the review and enforcement of
international arbitral awards.’ …. The New York Convention creates two
different review regimes for arbitral awards depending on whether a recognition
or enforcement action is brought in the country in which, or under the law of
which, the award was made or in another country. Gulf Petro Trading Co., 512
F.3d at 746. The first is deemed to have ‘primary jurisdiction over the award,’
whereas the second has ‘secondary jurisdiction.’ Id. … A court of primary
jurisdiction is ‘free to set aside or modify an award in accordance with [the
country’s] domestic arbitral law and its full panoply of express and implied
grounds for relief.’ Id. …”
“For courts with secondary
jurisdiction ‘Article V [of the New York Convention] enumerates the [seven]
exclusive grounds on which a court . . . may refuse recognition and enforcement
of an award.’ Id. at 747. Upon a motion to confirm an arbitral award under the
New York Convention, a court ‘shall confirm the award unless it finds one of
the grounds for refusal or deferral of recognition or enforcement of the award
specified in the said Convention.’ 9 U.S.C. § 207.” [Slip op. 8-9] (footnote
omitted)
“Personal jurisdiction is not
listed as a ground on which confirmation may be denied. Nevertheless, the fact
that a treaty and its implementing legislation do not specify that a petition
may be dismissed for lack of personal jurisdiction is not dispositive. No less
than subject matter jurisdiction—which is a ground to deny enforcement under
the New York Convention—personal jurisdiction ‘is ‘an essential element of the
jurisdiction of a district . . . court,’ without which the court is ‘powerless
to proceed to an adjudication.’’ Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574,
584… (1999) … Personal jurisdiction ‘represents a restriction on judicial power
. . . as a matter of individual liberty.’ Id. at 584 … Requiring a court to
have personal jurisdiction over a party as a matter of constitutional due
process ‘protects an individual’s liberty interest in not being subject to the
binding judgment of a forum with which he has established no meaningful
‘contacts, ties, or relations.’ … A party’s contacts with a forum must be
sufficient for the party to ‘reasonably anticipate being haled into court
there.’ World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).”
“Even though the New York
Convention does not list personal jurisdiction as a ground for denying
enforcement, the Due Process Clause requires that a court dismiss an action, on
motion, over which it has no personal jurisdiction. … 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. …. “
“Congress could no more dispense
with personal jurisdiction in an action to confirm a foreign arbitral award
than it could under any other statute. … Regardless of Congress’s intent in
failing explicitly to include a personal jurisdiction requirement, a court is
not thereby relieved of its responsibility to enforce those constitutional
protections that guard a party from appearing in a forum with which it has no
contacts.”
“Those circuits that have
considered this issue agree. 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.’); Glencore
Grain, 284 F.3d at 1121; see also S & Davis Int’l, Inc. v. Republic of
Yemen, 218 F.3d 1292, 1303-05 (11th Cir. 2000); Emp’rs Ins. of Wausau v. Banco
De Seguros Del Estado, 199 F.3d 937, 941-43 & n.1 (7th Cir. 1999)
(requiring personal jurisdiction in dispute arising under Inter-American
Convention on International Commercial Arbitration, but observing that result
would be the same under New York Convention).” […] [Slip op. 10-12]
Finally, the Court addresses First
Investment’s “alter ego” theory. “First Investment’s final argument against
dismissal of the Fujian Entities for lack of personal jurisdiction is that the
Fujian Entities were alter egos of the PRC. First Investment contends that
because a court need not establish personal jurisdiction over a foreign
sovereign, it was also error to dismiss that foreign sovereign’s alter egos for
lack of jurisdiction. As did the district court, we assume, without deciding,
that a foreign sovereign cannot raise a personal jurisdiction defense as it is
not a ‘person’ under the Due Process Clause. Price v. Socialist People’s Libyan
Arab Jamahiriya, 294 F.3d 82, 96-97 (D.C. Cir. 2002) (reasoning that foreign
states, like States of the Union, are not ‘persons’ under the Fifth Amendment)
…”
“Accordingly, if First Investment
successfully establishes that either of the Fujian Entities were alter egos of
the PRC then it would be improper for the district court to dismiss that party
for lack of personal jurisdiction. First National City Bank v. Banco Para El
Comercio Exterior de Cuba, 462 U.S. 611 … (1983) (‘Bancec’) ‘remains the
seminal case on the circumstance under which American courts may disregard the
separate status of instrumentalities created by foreign governments.’ … “
“Under Bancec, ‘duly created
instrumentalities of a foreign state are to be accorded a presumption of
independent status.’ 462 U.S. at 627. ‘A plaintiff can over come [sic] that
presumption, however, in certain circumstances by demonstrating that the
instrumentality is the agent or alter ego of the foreign state.’ … While not
establishing any ‘mechanical formula,’ the Bancec Court did list a
non-exhaustive list of factors to consider in determining whether the
presumption in favor of an entity’s separate juridical identity had been
overcome. 462 U.S. at 633. ‘[W]e look to the ownership and management structure
of the instrumentality, paying particularly close attention to whether the
government is involved in day-to-day operations, as well as the extent to which
the agent holds itself out to be acting on behalf of the government.’ …”
“Finally, we consider the
equitable principles discussed in Bancec, ‘particularly the principle of
disregarding the corporate form in instances where respecting it would lead to
injustice.’ Id. First Investment argues that the district court did not
sufficiently heed Bancec’s instruction that an instrumentality should not be
considered a separate legal entity when doing so would result in fraud or
injustice. First Investment further contends that the district court improperly
emphasized the need for a foreign state to exercise control over an
instrumentality’s daily activities without fully considering the totality of
the circumstances. Applying the considerations in Bancec to each of the Fujian
Entities we conclude that the district court did not err in determining that
First Investment has not overcome the presumption in favor of FSIGC and Mawei’s
separate juridical identity.” […]
“The district court considered
declarations by Wang Darong and Lin Jiang, each a partner in a separate Chinese
law firm. The Wang and Lin declarations established that FSIGC was wholly-owned
by the PRC, and that a branch of the PRC appoints FSIGC’s board of directors
and senior management personnel, and exercises the rights of a shareholder. The
Wang and Lin declarations also conceded, however, that FSIGC possessed
operational and managerial authority. …”
“There is no question that this
evidence, considered alone, would not satisfy Bancec’s standard for finding an
alter ego relationship between a foreign state and its instrumentality. As we
have previously determined, the mere fact that a government owns 100% of a
company’s stock is not sufficient to establish control. … The declarations also
provide no indication that FSIGC’s officers were acting in the PRC’s interests
and controlling FSIGC’s day-to-day operations on the PRC’s behalf. Nor do the
declarations evidence any injustice that would flow from respecting FSIGC’s
corporate form.” […]
“Nor has First Investment
presented equitable considerations sufficient to disregard FSIGC’s corporate
identity. For First Investment to meet this prong, it is not sufficient for it
merely to point out an injustice that would result from an adverse decision.
Rather, First Investment must show how the PRC manipulated FSIGC’s corporate
form to perpetuate a fraud or injustice. …. Here, First Investment has failed
to show that the PRC used FSIGC’s corporate form to manipulate circumstances in
such a way as to do something it otherwise would not have been able to do.
First Investment has also not shown that the PRC is shielding FSIGC from an
adverse arbitral award because the real burden of such an award would fall on
the PRC. The only evidence First Investment puts forward is that the PRC is
FSIGC’s sole shareholder.”
“As already stated, this is
insufficient to establish an alter ego relationship. … Were we to accept First
Investment’s argument we would effectively wipe out the presumption of
separateness. Following First Investment’s logic, anytime a foreign sovereign
owned the majority of shares in a company, and took any action that assisted
that company, it would provide grounds for ignoring that company’s separate
juridical identity. …”
“Nor is the PRC committing a fraud
against First Investment. Although the PRC may have delayed initiation of the
confirmation proceeding, First Investment ultimately did bring such an action
in China. Moreover, the Chinese court provided a reasoned opinion that denied
enforcement on the ground that the panel’s third arbitrator did not approve the
final draft.”
“Accordingly, the district court
correctly concluded that there did not exist an alter ego relationship between
FSIGC and the PRC, and properly dismissed FSIGC for lack of personal jurisdiction.”
[Slip op. 15-20]
The Court then quickly disposes of
First Investment’s case against the PRC. “Pursuant to the Foreign Sovereign
Immunities Act (‘FSIA’), 28 U.S.C. § 1604, a ‘foreign state shall be immune
from the jurisdiction of the courts of the United States and of the States’
unless one of several statutorily defined exceptions applies. The district
court correctly recognized, and the parties do not dispute, that the only
potentially applicable exception is § 1605(a)(6)’s arbitration exception.”
“Under that provision, foreign
states are considered to have waived their sovereign immunity in cases ‘to
enforce an agreement made by the foreign state with or for the benefit of a
private party to submit to arbitration all or any differences which have arisen
or which may arise between the parties with respect to a defined legal
relationship, whether contractual or not, concerning a subject matter capable
of settlement by arbitration under the laws of the United States, or to confirm
an award made pursuant to such an agreement to arbitrate . . . ‘28 U.S.C. §
1605(a)(6).”
“The PRC was not, however, a party
to the arbitration agreement between First Investment and the Fujian Entities.
The district court thus considered whether the PRC could be bound to the
arbitration agreement through the Fujian Entities. For the same reasons it
concluded that the Fujian Entities were not alter egos of the PRC, the district
court concluded that the PRC could not be bound to the agreement. Accordingly,
the district court held that the arbitration exception in § 1605(a)(6) did not
apply and that it lacked subject matter jurisdiction over First Investment’s
petition against the PRC.”
“… [W]e understand First
Investment’s argument on subject matter jurisdiction to be identical to its
personal jurisdiction argument. Thus, if First Investment can establish an
alter ego relationship between the Fujian Entities and the PRC then the PRC can
be bound to the arbitration agreement to which the Fujian Entities are a party.
… As discussed, supra, First Investment cannot meet Bancec’s standard for
establishing an alter ego relationship. Having raised no other ground on which
to find subject matter jurisdiction over the PRC, this conclusion is fatal to
First Investment’s petition.” [Slip op. 21-22]
Concluding that the district court
properly dismissed the People’s Republic of China for lack of subject matter
jurisdiction, the Court affirms the district court.
Citation: First
Investment Corporation of the Marshall Islands v. Fujian Mawei Shipbuilding,
Limited, 703 F.3d 742 (5th Cir., 2012) (revised January 17, 2013).
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
