The Wall Street Journal published a riveting story last fall with tales of 007-like investigators chasing a debtor down in a London restaurant in order to collect a judgment that the derelict award-debtor was evading.[1] “Success” equated to the eventual “voluntary” payment of approximately $30 million on a judgment valued, with interest, at roughly $38 million. “Success” also came at the cost of approximately $10 million in surveillance and other collection-related expenses, and the further payment to the financing firm that funded the efforts of an estimated $12 million. In other words, lost among the sensational details was that the cost of enforcing a money judgment or arbitration award can be quite high, and “success” may mean the creditor recovers only a small percentage of the judgment or award (in the reported case, about 25%).
For most dispute resolution specialists, it is satisfying that the Wall Street Journal focused on the enforcement stage of the dispute resolution process. Too little attention is paid to enforcement risk, both at the time of contracting and at the time a dispute arises. “Enforcement risk” is distinct from “credit risk”— that is, the risk that a contractual counterparty may prove financially incapable of paying obligations. Enforcement risk contemplates that a financially-capable counterparty will refuse to meet its obligations and, through structuring of assets or other means, attempt to evade recovery or make it so difficult that the creditor is willing to accept less than the full amount owed. Enforcement risk is often an issue in international transactions with counterparties based in countries with unfamiliar or opaque legal systems. But enforcement risk can also arise in other circumstances; for example, in transactions involving counterparties that have complex, multi-jurisdictional operating structures capable of concealing assets. The Panama Papers and the Paradise Papers scandals arising out of the hacking of Panamanian and Bermudan law firms revealed just how common this is.
This article reviews contractual strategies that can help mitigate enforcement risk, either by arming creditors with tools to aid in enforcement of judgments or arbitral awards, or by increasing the costs to a debtor of resisting enforcement. Each international negotiation is different, and not all of the provisions discussed will be appropriate in every international commercial agreement. But provisions like those reviewed provide opportunities to limit the risk that either party refuses to honor the result produced by an agreed process for resolving disputes.[2]
1. Choose Arbitration Over Litigation
A first relevant decision is whether to choose arbitration or a national court system for resolving disputes. In international contracts between sophisticated actors, arbitration can provide a clear advantage because arbitration awards generally can be enforced across national borders more easily than national court judgments. A multilateral treaty — the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards — establishes a streamlined process for recognizing and enforcing arbitration awards. As of August 1, 2017, the New York Convention is in force in 155 countries around the world. No similar multilateral convention establishes a procedure for one nation to enforce judgments of the courts of so many other nations.
Notwithstanding the New York Convention, collection of arbitration awards can still be challenging and expensive, particularly when awards are made against entities (or sovereigns) whose assets are concentrated in jurisdiction(s) that either are not a signatory to the New York Convention or have a tendency to apply the New York Convention’s procedures restrictively.[3] Nonetheless, from an enforcement perspective, it is almost always easier to enforce an international arbitration award across international borders than it is to enforce a national court judgment.[4]
2. Require Award Debtors to Fund the Costs of Enforcement
Any time a debtor refuses to pay a debt voluntarily, the creditor incurs costs to collect the debt. Even enforcement of an arbitration award in a New York Convention country requires a legal proceeding, which means legal fees and related costs. In many countries, those fees and costs are not recoverable unless the contract specifically empowers a court to award them. For example, U.S. courts have consistently held themselves powerless to award attorneys’ fees and costs in connection with successful applications to confirm and enforce an arbitration award unless a statute or contract authorizes the court to award fees to the prevailing party.[5] The U.S. Federal Arbitration Act does not provide for award of attorneys’ fees, leaving most U.S. courts to search the parties’ contracts for any authority to award fees.
In light of this common standard, parties should consider contractual provisions making recalcitrant debtors responsible for the costs and fees associated with enforcement activities. Authority to award fees in a confirmation action can be made expressly in a contract through a provision directed specifically at the issue, for example:
Should either party need to pursue or defend judicial proceedings in relation to an arbitration award made pursuant to this Agreement, the party prevailing in such judicial proceedings shall recover all of its reasonable attorneys’ fees and costs, and a court shall order such payment pursuant to this provision.
Although more risky, a party may prefer to address the issue more subtly. For example, a U.S. court held last year that it had authority to award attorneys’ fees in a confirmation action where the parties had agreed that “[i]n the event of any legal dispute … relating to the Agreement, including arbitration, … the most prevailing party … shall be entitled to all costs and legal expenses including … attorney fees [and] court costs.” CPR Telecom Corp. v. Bullseye Telecom, Inc., No. 16-CV-10214, 2017 WL 106429, at *4 (E.D. Mich. Jan. 11, 2017). Key to the Court’s analysis was that the fee shifting clause was not limited to arbitration, and instead applied broadly to “any legal dispute . . . including arbitration.”
While there may be other strategies for pursuing attorneys’ fees based on statute[6] or on a breach of the underlying agreement,[7] addressing attorneys’ fees needed for enforcement in the contract is a safe way to disincentivize resistance to an award, or at least to mitigate the consequences of that resistance. Indeed, absent a fee-shifting provision, the only cost for a debtor to pursue judicial challenges to an arbitration award or judicial judgment may be the legal fees of the debtor. Requiring the debtor to fund not only its own expenses, but also the costs and fees of the creditor, fundamentally changes the value of frivolous judicial challenges.
3. Provide for Waiver of Appeal/Challenge Rights
One aspect of arbitration cherished by many of its adherents is the limited nature of judicial review of arbitration awards once they are issued. As noted above, the New York Convention provides only narrow categories of judicial review of arbitration awards. The Convention does not permit a national court to sit as a traditional appeals court with power to revisit the underlying dispute. It is worth noting, however, that some national arbitration laws, such as the English Arbitration Act, provide for the possibility of more substantive review of certain legal issues.
Even though judicial review under the New York Convention is narrow, the presence of any judicial review of an arbitration award creates opportunity for creative lawyering and increased costs of enforcement (particularly in the absence of a fee-shifting provision like the one described in the previous section).[8] One way to limit the power of parties seeking to obstruct the enforcement of an arbitral award is thus to limit their ability to seek judicial review even more than the New York Convention and national arbitration laws might otherwise permit. For example, parties might include a provision stating:
Any award made pursuant to this Agreement shall be binding and may be entered as a final judgment in any court having jurisdiction. The parties agree that the award shall not be reviewable or appealable in any court of law, and expressly waive any right to seek judicial review or appeal from the award.
The legal effect of such a clause may vary from jurisdiction to jurisdiction. In the United States, for example, some courts have held that since arbitration is a creature of contract, a clear agreement to eliminate all judicial review of an arbitration award will be enforced.[9] Other courts, however, have been reluctant to eliminate all form of judicial review, and have held that parties cannot waive the right to raise the narrow grounds for review set forth in the U.S. Federal Arbitration Act.[10] Similarly, courts have interpreted agreements that an arbitration award would be “binding, final and non-appealable” as having no effect on parties’ ability to seek review based, for example, on an arbitrator’s bias.[11]
In some jurisdictions that permit limited judicial review of the substance of arbitration awards, a specific waiver may be needed to limit judicial review that would otherwise be available as a matter of national law. For example, Sections 45 and 69 of the English Arbitration Act permit limited judicial review of questions of English law in arbitrations seated in England unless the parties have agreed to waive their rights to seek such review.[12] Waiver can be accomplished either by express language such as, “The Parties hereby exclude the applicability of Sections 45 and 69 of the English Arbitration Act, 1996,” or by agreeing to arbitrate pursuant to arbitral institution rules that exclude judicial review, such as the rules of the London Court of International Arbitration or of the International Chamber of Commerce.[13] Thus, depending on the seat of arbitration, parties may need to waive statutory substantive review in order to restrict challenges to the narrow grounds of review available under the New York Convention.
As a cautionary note, a clause waiving all judicial review of an arbitration award may in fact eliminate all judicial review, so be careful what you ask for. But depending on objectives, a properly drafted clause can reinforce the parties’ intent that judicial review not interfere unnecessarily with enforcement of an award, and will likely foreclose judicial review of the substance of an award.
4. Provide for High Post-Award Interest in the Arbitration Agreement
Arbitral tribunals traditionally have discretion — subject to a choice of law analysis — to award interest for the period between the point in time when a claim arises and award, as well as for the period from issuance of an award to payment of that award.[14] In the absence of contractual or statutory guidance, arbitrators can base rate and terms of interest on various factors. Many national legal systems have statutory interest rates applicable to judgments; these rates can, however, be quite low. As a general rule, those statutory rates are not mandatory or directly applicable to arbitral awards. Arbitral institution rules, meanwhile, do not address the interest rate applicable to awards.[15]
Setting a high contractual rate of interest for unpaid arbitral awards is thus another way to encourage quick payment of awards, or at least to make delayed payment more palatable. Arbitrators will generally respect such expressions of intent, as do most national court systems.[16] A simple clause along the following lines may be effective:
Any award issued under this Section XX shall be payable in full within thirty (30) business days of being made. The arbitral tribunal shall provide for interest at a rate of 12% per annum, compounded quarterly, for any portion of an award not paid within thirty (30) business days of being made until such award is paid in full. These interest terms shall survive conversion of the award into a national court judgment.
It is important to make clear in such a clause (i) whether interest is to be calculated on a simple or compound basis and (ii) that entry of a judgment on the award shall not displace the contractual interest terms. The second point is important to avoid the risk that in jurisdictions where confirmation of an arbitration award merges the award into a local court judgement, local statutory interest rates applicable to judgments do not apply.[17]
Securing a high interest rate may fundamentally change a creditor’s approach to enforcement of awards against creditworthy debtors. Indeed, most counterparties involved in international commerce of the sort that leads to international disputes will have, or will eventually have, assets located in jurisdictions that permit attachment. A high rate of interest allows the creditor to be patient in pursuing such claims.
5. Require Award Debtors Seeking to Resist Enforcement to Bond the Award
Another way to protect against enforcement risk is to require a party who wishes to challenge an award to post a bond guaranteeing payment of the award if the challenge is not successful. In the United States and some other jurisdictions, appellants may be required to post a bond in order to prevent enforcement of a judgment pending appeal.[18] This approach has the effect of protecting a creditor from dissipation by the debtor of assets pending appeal, or unwillingness of the debtor to abide by an appellate decision with which it disagrees. The clause contemplated here advances those same goals, but even more stringently, effectively requiring a bond to pursue a judicial challenge to an arbitral award:
If a party asserts that an award made under this Section XX is not enforceable against it for any reason (in any jurisdiction), that party shall only be permitted to present such argument after posting security in the form of a bond, letter of credit or bank guarantee for the full amount of the award plus one year of interest on the award. The parties hereby waive any right or ability they may have to challenge or otherwise resist enforcement of an award without posting security as provided by this Section, it being the intent of the parties that no court will entertain any challenge to the validity or enforceability of an award made under this Section XX in the absence of such security.
In circumstances where a debtor lacks resources to post a bond prior to challenging an award, this type of clause would deprive the debtor of the ability to challenge an award. But in the context on which this article focuses – international agreements among sophisticated parties – it would be difficult to assert that such a clause should not be enforced because it is unfair. In any event, if the effect of the clause is to prevent a party from pursuing an otherwise valid challenge, then courts may have ways to limit enforcement of the clause.[19] In most cases, however, the clause would raise the stakes for a party seeking to challenge an award, and force that party to abide by the result.
Conclusion
No combination of provisions can ensure that an intransigent award debtor will voluntarily meet its obligations. But there are tools available that can reduce the power of intransigent debtors to make mischief. Provisions like those described above that impose costs on those who seek to avoid their debts without legal basis are some of these tools. Incorporating these types of provisions at the contracting stage can make life as an award creditor much more cost-effective − and make 007-like tactics less likely − should enforcement become an issue.
[1] Jet-Set Debt Collectors Join a Lucrative Game: Hunting the Superrich, Margot Patrick, Wall Street Journal, November 7, 2017.
[2] This article does not focus on credit risk and tools for protecting against it, such as letters of credit or parent guarantees. Such tools can be effective in protecting against both credit risk and enforcement risk. But they may not always be available, or may come at too high a commercial cost.
[3] Various signatories to the New York Convention have developed reputations for being difficult environments in which to enforce arbitration awards against their own nationals. For example, national courts might have a tendency to apply broadly the public policy exception to enforcement of an award to bar enforcement of awards that are not consistent with national law. In this regard, it is important to look at the actual enforcement practices of a state, rather than accept its reputation (whether it is positive or negative).
[4] In drafting an arbitration agreement, enforcement issues can bear on the choice of a seat for the arbitration, with some jurisdictions offering more robust tools for enforcement of arbitration awards than others. This article does not focus on drafting of the arbitration agreement, but drafters should consider enforcement related issues when selecting an arbitral seat.
[5] See, e.g., Crossville Medical Oncology P.C. v. Glenwood Systems L.L.C., 610 Fed. Appx. 464, 468 (6th Cir. 2015); Menke v. Manchecourt, 17 F.3d 1007, 1009 (7th Cir. 1994); Schlobohm v. Pepperidge Farm, Inc., 806 F.2d 578, 581-82 (5th Cir. 1988).
[6] Some commentators have suggested that it may be possible to base a claim for attorneys’ fees in a confirmation action on applicable state law in the United States.
[7] Many arbitration agreements specifically provide that an award shall be paid within a certain period of time. Failure to make such payment would thus constitute an independent breach of the underlying agreement with the damages measured, perhaps in part, by the attorneys’ fees and other costs required to secure payment on the award. Of course, this type of proceeding would require a new arbitration and thus additional time and cost to pursue.
[8] Although this discussion focuses on waiver of challenge rights to an arbitral award, it may also be possible to restrict appeal from trial verdicts in commercial contract matters. Analyzing the enforceability of such waivers in the trial context is beyond the scope of this article.
[9] See Aerojet-General Corp. v. Am. Arbitration Ass’n, 478 F.2d 248, 251 (9th Cir. 1973); Kim-C1, LLC v. Valent Biosciences Corp., 756 F. Supp. 2d 1258 (E.D. Cal. 2010).
[10] See Hoeft v. MVL Group, Inc., 343 F.3d 57, 63 (2d Cir. 2003).
[11] See Rollins Inc. v. Black, 167 Fed. App’x 798, 799 (11th Cir. 2006).
[12] Section 45 concerns applications made during the arbitration proceedings, while section 69 concerns applications made after an award has been rendered.
[13] English courts have consistently held that incorporation of such arbitral rules waives rights sections 45 and 69. See Lesotho Highlands Development Authority v. Impregilo SpA [2006] 1 AC 221; Arab African Energy Corporation Ltd v. Olieprodukten Nederland BV. [1983] 2 Lloyd’s Rep. 419; Marine Contractors, Inc. v. Shell Petroleum Development Co. of Nigeria Ltd., [1984] 2 Lloyd’s Rep. 77.
[14] See Gary B. Born, International Commercial Arbitration, § 23.09 (2d ed. 2014).
[15] While the LCIA rules do not provide a rate of interest, they expressly empower arbitrators to award compound interest unless the parties have agreed otherwise. See LCIA Rule 26(4).
[16] In some cases, a national legal system may not permit award of interest at all, such as some Middle Eastern states that have commercial codes based on Shari’a law.
[17] E. Sav. Bank, FSB v. McLaughlin, No. 13-CV-1108 NGG LB, 2014 WL 2440582, at *2 (E.D.N.Y. May 30, 2014) (applying New York law to hold that “where there is a clear, unambiguous, and unequivocal expression to pay an interest rate higher than the statutory interest rate until the judgment is satisfied, the contractual interest rate is the proper rate to be applied.”); see also NML Capital v. Republic of Argentina, 17 N.Y.3d 250, 928 N.Y.S.2d 666, 952 N.E.2d 482, 489 (N.Y.2011) (“[I]nclusion of a clause directing that interest accrues at a particular rate ‘until the principal is paid’ (or words to that effect) alters the general rule that interest on principal is calculated pursuant to New York’s statutory interest rate after the loan matures or the debtor defaults.”)
[18] See, e.g., Fed R. Civ. Proc. 62.
[19] See also, infra, at n. 10. Authorities that hold the limited grounds for judicial review set forth in the New York Convention are mandatory could also suggest that a bond requirement like the one contemplated should not restrict assertion of potentially valid New York Convention defenses.
