Posts Tagged Recognition and enforcement
Bitcoin online resolution award refused recognition and enforcement at Amsterdam (ordre public exception of New York Convention).
I tweeted it earlier yet was asked to put a review up on the blog (which also suits my archiving purposes) of ECLI:NL:GHAMS:2019:192 X v Y (I know that does not help much) at the Amsterdam Court of Appeal, 29 January 2019. The case came to me courtesy of Freshields who have review here.
The case illustrates some of the issues involving online alternative dispute resolution, including those manned by artificial intelligence (albeit the latter was not directly at stake here).
Using an online trading platform, X provided three loans to Y, all in bitcoins at an interest rate of 5% per month. To borrow these bitcoins, Y had to agree on the conditions of the online bitcoin-trading platform applicable to the loans. These conditions included the following dispute resolution mechanism clause:
If you fail to pay principal and/or interest on the date on which the loan falls due, you will be considered in default of the Registration Agreement… Should your loan become 90 days past due (“Defaulted”) the loan will be sent to Dhami Law Firm (“Arbitrator”), an independent, international arbitration firm whose awards are recognized internationally under The United Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
I understand that in the event that I want to appear in the arbitration by email to contest the potential issuance of an award in favor of the lenders, I must send a written request to firstname.lastname@example.org and pay a $ 99.00 fee. Such request must be within 7 calendar days from the date of the Notice of Default. The Arbitrator’s decision shall be final and legally binding. In the event that the Arbitrator issues an award in favor of the investor, an investor may enforce that judgment in a court of competent jurisdiction.
The conditions further contained the following arbitration clause:
All claims and disputes arising under or relating to this agreement are to be settled by binding arbitration in the state of California or another location mutually agreeable to the parties. An award of arbitration may be confirmed in a court of competent jurisdiction.
Default ensued, as did ADR, and Y sought enforcement in The Netherlands. The Courts have now refused proprio motu (Y had signalled he had no objection), for the following reasons summarised by Freshfields: First, the court took issue with the circumstance that – in its view – online arbitral proceedings automatically become pending after 90 days. Second, a defendant wishing to defend itself in these arbitral proceedings had been required to write an email within seven days from receiving a notice of default. Third, the arbitral tribunal had failed to inform Y that a dispute was pending against him or of the legal grounds of the action.
At 3.5 is it is clear that the principle of audi alteram partem is the main stumbling block for the Dutch Courts. Ordre public violated. A clear flashpoint for ADR, including of the algorithmic variety.
Cuzco v Tera (Chapter 11). Respect for Korean exclusive jurisdictional rule (shareholder derivative claims) does not trump US subject-matter jurisdiction.
Thank you Dechert for flagging Case No. 16-00636 Cuzco v Tera (Chapter 11), in which Faris J with great clarity wades in on a motion to dismiss US Chapter 11 jurisdiction in favour of exclusive jurisdiction for the Seoul courts with respect to a Korean company shareholder derivative action.
The case is relevant to insolvency practitioners. More generally however it highlights the need for a court to keep a level heading when wading through to and fro litigation in various States.
A bit of factual detail is required to appreciate the ruling.
Cuzco USA filed a chapter 11 in Hawaii with its sole asset real property in Hawaii. Tera Resources Co., Ltd. (“Tera”), one of Cuzco Korea’s shareholders asserted that the Debtor and its insiders conspired to deprive Cuzco Korea of the value of the real property. Tera commenced an action for fraud, breach of fiduciary duties, piercing the corporate veil, unjust enrichment and imposition of constructive trust.
The defendants moved to dismiss, in favour of the Korean courts – and failed, both on arguments of forum non conveniens and on arguments of there being exclusive jurisdiction for the courts at Seoul. Defendant Mr Lee is purportedly the manager of Cuzco USA and the representative director of Cuzco Korea. Defendant Ms Yang is shareholder and creditor of Cuzco Korea and an ally of Mr. Lee.
Cuzco USA had proposed, and the court confirmed, a Third Amended Plan of Reorganization. Briefly summarized, the Third Amended Plan provided that Cuzco USA would transfer the Keeaumoku (Hawaii) Property to Newco, a Hawaii limited liability company of which Mr. Lee is the sole member, that Newco would attempt to raise enough money through a refinancing to repay all of Cuzco USA’s creditors in full, and that if the refinancing did not occur by a date certain, Newco would sell the Keeaumoku Property at auction and distribute the proceeds to Cuzco USA’s creditors.
Tera and others filed motions for reconsideration of the order confirming the Third Amended Plan. Tera is a shareholder of Cuzco Korea. It also holds a judgment, entered by a Korean court, against Ms. Yang, and orders from a Korean court that, according to Tera, resulted in the seizure of Ms. Yang’s interests in and claims against Cuzco Korea.
Cuzco USA then moved to modify the Third Amended Plan and replaced it with a Fourth Amended Plan. Briefly summarized, this Plan eliminates the transfer of the Keeaumoku Property to Newco; instead, Cuzco USA will retain the property and either refinance it or sell it at auction. Tera and others vigorously objected to plan confirmation on multiple grounds. The court confirmed the Fourth Amended Plan.
Tera argued (among other things) that the Third Amended Plan was the product of a fraudulent scheme by Mr. Lee, Ms. Yang, and others to divert the equity in Cuzco USA from Cuzco Korea to themselves and to render Tera’s interests in Cuzco Korea worthless.
That Korean law covers governs the right to bring derivative claims on behalf of a Korean corporation is not under dispute between the parties. (It is therefore considered part of the rules on internal organisation which are subject to lex societatis). However Faris J dismissed defendants’ suggestion that the US court should also respect Korea’s jurisdictional rules that such suits be brought in Seoul only.
At B, p.10: US statutes confer subject matter jurisdiction on US courts. Statutes of another nation, such as the South Korean statute on which the moving defendants rely, cannot change the subject matter jurisdiction of a United States bankruptcy court under a United States statute.
Forum non conveniens was dismissed for there is a strong policy that favors centralization of claims against the debtor in the bankruptcy court that outweighs any other interest (at C, p.12). One would have to have strong arguments to push that aside and clearly these were not present here.
Liberato: violation of lis alibi pendens rules does not justify refusal of enforcement on grounds of ordre public.
I reviewed Bot AG’s Opinion in C-386/17 Liberato here. The Court confirmed last week. Whether lis alibi pendens applies, entails applying jurisdictional rules (in essence an assessment as to whether parties are the same etc.). Except in the very rare cases of (now) Article 45 1(e) Brussels I Recast, infringement of jurisdictional rules does not feature among the reasons for refusal of recognition. Alleged infringement of the lis alibi pendens rule does not therefore qualify as ordre public.
(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 220.127.116.11.3, 18.104.22.168.4.
SAS Institute v World Programming. Ordre Public, res judicata, fraus and (European) statute conspire against enforcement.
SAS Institute Inc v World Programming Limited  EWHC 3452 (Comm) is a rare example of refusal by an English court of enforcement of a US judgment. 20 Essex Street have excellent analysis here and I am happy generally to refer.
The outcome of English Proceedings was that WPL defeated SAS’ claims regarding software licence and copyright infringements, with an important role played by the European software Directive as applied by the CJEU in Case C-406/10 upon preliminary reference in the very case.
Meanwhile SAS had commenced concurrent proceedings in the US. WPL initially objected to the US Proceedings on forum non conveniens and other jurisdictional grounds. These objections were later withdrawn and WPL submitted to the jurisdiction of the US District Court and participated in the process before it. Judgment was awarded against it. SAS curtailed its claim of enforcement to as to increase chances of success: it only seeks to enforce the US Judgment in England insofar as it is for compensatory damages based on WPL’s fraud (an issue which was litigated in the US but not in the UK); it does not seek to enforce the breach of contract claim or that part of the US Judgment which awarded multiple damages.
At 35-36 Cockerill J summarises the law: ‘There are three strands of potential preclusion: cause of action estoppel (not live here) issue estoppel and Henderson v Henderson abuse of process. As Lord Sumption observed in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd  UKSC 46,  AC 160 at p.180H at :
“…the policy underlying all of the…[res judicata] principles…” is “…the more general procedural rule against abusive proceedings…”.
The different doctrines therefore have different requirements, but they shoot at the same target – that of ensuring that nobody should be vexed twice in respect of one and the same cause: “nemo debet bis vexari pro una et eadem causa“: as it was put by Lord Diplock in Vervaeke v Smith  AC 145 at p.160A-B, G. A more modern version was given by Lord Bingham in Johnson v Gore Wood  2 AC 1 at p.31A-B in the context of the Henderson doctrine:
“Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole.” ‘
Issue estoppel per Dicey (referred to by Cockerill J) at paragraph 14-156 means that a “foreign judgment will not be recognised if it is inconsistent with a previous decision of a competent English court in proceedings between the same parties“. Akin therefore in residual English private international law (EU law is not engaged, the judgment having been issued ex-EU) to Brussels I Recast’s Article 45(1)c ‘s rule.
The fundamental point is that issue estoppel bars relitigation not of all issues, but only of issues determined as an essential part of the cause of action (at 40). The Henderson principle is concerned with protecting the integrity of the cause of action and issue estoppel defences and preventing them from being deliberately or inadvertently circumvented by a party which did not advance an argument in England which would otherwise have created such an estoppel (at 47).
This is the core of the abuse investigation and this formulated one can see why it is a difficult test to apply.
At 55: ‘There are two issues: was the Fraud claim “parasitic” on the breach of contract claim and the related question of whether the Fraud claim was a separate, distinct and independent cause of action. Both of these really go to the question of whether there is sufficient identity of issue.’ At 73 Cockerill J concludes that there was such abuse: ‘Ultimately, I have come to the conclusion that the existence of the terms of the contract was a fundamental building block for the Fraud Claim and that without it that claim – as it was formulated in the US – could not have been run. The essence of the case in the US Proceedings related to alleged fraudulent representations concerning its “present intention to comply with those terms”. It was fundamental to the claim that WPL “had no intention of abiding by those terms“. It was inherent in that case that those terms did exist; and yet the courts of this country had already held that those terms did not exist.’
Obiter, at 156 ff, Cockerill J adds that enforcement would also have been refused for reasons of the public policy embodied in the Software Directive. Authority in the arbitration context was referred to to pro inspiratio, including CJEU authority C-168/05 Mostaza Claro and C-126/97 Eco Swiss (at 163). At 179: ‘The fundamental problem for SAS is that the Directive plainly envisages the rendering null and void of provisions such as those on which SAS wants to rely, indeed that is explicitly the policy enunciated in the case-law and yet SAS’s fraud case is dependent upon those terms’ existence. The effect of the Directive is, as I have indicated above, to make SAS’s fraud claim (as formulated) impossible to express. It is therefore unrealistic to analyse the matter as the Directive “authorising frauds“.’ And at 184: ‘It is clear that the Software Directive gives expression to two important public policy objectives of preventing the monopolisation of ideas and promoting competition and consumer welfare.’
A very lengthy judgment which merits full reading.
Update 22 February 2019 for a most excellent and critical paper by Ronald Brand calling for the 2019 Judgments Project Conference to be aware of all options for international harmonisation in the area see here.
Kraft Foods v Bega Cheese  FCA 549 was signalled to me by Michael Mitchell back in early May – now seems a good opportunity briefly to report on it. The Federal Court of Australia issued an anti-arbitration injunction to restrain a multinational food conglomerate from pursuing arbitration in New York. Kraft had pursued litigation in Australia which not only sought to restrain the respondent from certain radio and television advertising, but also sought final relief including damages.
Parties had agreed to mediate and arbitrate under the dispute resolution provisions of a Master Agreement for licensing of IP. Bega had acquired certain rights from Mondelez (a company in the Kraft group), including certain trademark rights that Kraft had licensed to Mondelez pursuant to the Master Agreement.
Of interest to the blog is the myriad number of issues that led the Court to issue the injunction, among others the fact that what was sought included interim relief, the position of which when it comes to enforcement is not entirely clear in the New York Convention. Throw intellectual property, mediation as well as arbitration, common law doctrine principles such as the Aldi rule in the mix, and the jurisdictional soup becomes quite attractive as well as complex. Precisely why intellectual property is hotly debated in the Hague Judgments project and likely to be excluded from it.
That latter brings me to the second part of the blog title: the HCCH have issued a Revised Draft Explanatory Report, and a document on the possible exclusion of anti-trust matters from the Convention as reflected in Article 2(1)(p) of the 2018 draft Convention. Both signal the continuing difficulty of the roll-out of the Hague Process, as well as continued intent to let the train roll into its end destination; although one wonders how many wagons will have been left behind en route.
(Handbook of) EU Private International Law, 2nd ed. 2016. Chapter 2.