By Lionel Schooler
For the second time this year, the United States Court of Appeals for the Fifth Circuit has issued a decision interpreting and applying the New York Convention in an international arbitration case. In the most recent decision, OJSC Ukrnafta v. Carpatsky Petroleum Corp., the Court comprehensively addresses numerous jurisdictional and substantive challenges in analyzing an award under the Convention, resolving a long-running international arbitration case.
Business Relationship of the Parties. The award in question was rendered in September 2010 by a Swedish arbitration tribunal. It focused upon a 1994 joint activity agreement (JAA) between OJSC Ukrnafta (a Ukrainian state oil and gas enterprise), and Carpatsky Petroleum (originally organized under the laws of Texas). The two parties initially agreed to develop petroleum, and later agreed to develop a gas condensate field in Ukraine.
Carpatsky was originally incorporated in Texas, but in 1996 merged into a newly incorporated Delaware company with the same name. Even so, a subsequent amendment of the JAA identified Carpatsky as still registered as a Texas entity.
The original JAA called for resolution of all disputes by an arbitration to be conducted in the Ukraine. However, in 1998 the JAA was further amended to change the arbitration venue to Stockholm (but still indicating that Carpatsky was registered as a Texas entity). Of note was the fact that the JAA contained what proved to be a controversial limitation of liability clause.
Background of Arbitral Dispute. Because Carpatsky failed to contribute its required share of capital, Ukrnafta increased its own contributions and its asserted ownership interest. It then declared itself to be the sole owner of the project in response to Carpatsky’s expressed intention to complete its own capital contributions. This triggered the long-running litigation process described below.
Arbitration Proceedings and Confirmation
Swedish Arbitration. In 2007, Carpatsky initiated an arbitration proceeding in Stockholm, asserting breach of contract by Ukrnafta. Carpatsky identified itself as a Delaware corporation in this proceeding, in both its request to arbitrate and its subsequent statement of claim. Ukrnafta answered the request by agreeing to proceed in arbitration, and did not challenge the jurisdiction of the Swedish tribunal.
A year later, however, Ukrnafta disputed jurisdiction. It contended that it took this action because it had recently discovered that Carpatsky had changed its corporate status from a Texas entity to a Delaware entity. Ukrnafta therefore contended that there was no arbitration agreement with “Carpatsky Delaware.”
American Litigation. Ukrnafta then sued Carpatsky in Texas state court in 2009, alleging that all documents signed by Carpatsky after 1996 were void because signed by the “defunct” Texas corporation, including the JAA amendment that changed arbitration venue to Stockholm. Carpatsky removed this lawsuit to the United States District Court for the Southern District of Texas on the basis of the removal provisions of the Convention (9 U.S.C. §205). The District Court granted Carpatsky’s request to stay the litigation because of the pending arbitral proceeding in Stockholm, and also denied Ukrnafta’s subsequent motion to remand.
European Litigation Over Jurisdiction. In Stockholm, the arbitral tribunal rejected Ukrnafta’s jurisdictional challenge as untimely and waived. Ukrnafta then filed litigation in Sweden and in Ukraine concerning arbitral jurisdiction. Within two months, the Ukrainian court granted all relief to Ukrnafta, deeming all agreements by Carpatsky Delaware to be “non-executed,” and thus also declaring that there was no valid agreement to arbitrate in Stockholm.
Arbitral Award. The Stockholm tribunal nevertheless moved ahead with the arbitration and, in September 2010, awarded Carpatsky approximately $147,000,000.00 on its claims. It further declared the JAA terminated because of Ukrnafta’s breach of agreement and, as a result, that any limitation of liability language in the JAA was not enforceable. In the award, the tribunal held that Carpatsky Delaware was a proper party to the JAA, applying Delaware law in upholding the validity of the agreements signed by Carpatsky’s representative.
Award Confirmation Process. Carpatsky then returned to the U.S. District Court in Houston, seeking a lifting of the original stay and a confirmation of the award. The District Court declined to confirm the award, however, continuing the stay to await the outcome of the lawsuit filed by Ukrnafta in Sweden challenging the jurisdiction of the Stockholm tribunal. The Swedish court eventually ruled against Ukrnafta on its jurisdictional challenge, and therefore rejected its challenge to the tribunal’s arbitration award.
In 2017, the District Court then re-opened the lawsuit and confirmed the award, simultaneously rejecting Ukrnafta’s state law claims.
Appellate Issues Resolved
The Fifth Circuit was presented with several legal issues to resolve on appeal: removal jurisdiction; standards for award confirmation/non-recognition, including the ability to present a case, the scope of the submission to arbitration, the composition of the arbitral authority; public policy constraints; and manifest disregard of the contractual limitation of liability. It was also required to adjudicate the viability of Ukrnafta’s state law tort claims.
Removal Jurisdiction. The Court first considered the issue of the District Court’s authority to adjudicate upon removal the matters presented to it. Focusing upon §205 of the Convention, the Court interpreted its expansive language (removal allowed where the subject matter “relates to an arbitration agreement or award falling under the Convention”) as representing one of the broadest removal provisions in any statute book. Construing the standard to be one with “any conceivable connection to an arbitration agreement,” the Court found that removal was proper, and would have been even if it had turned out that there was no arbitration agreement, given the non-frivolous claim urged by Carpatsky.
In so holding, the Court noted that the 1998 JAA Agreement which was the target of Ukrnafta’s contention that no arbitration agreement existed, identified the other entity as “Carpatsky Petroleum Corporation USA.” The Court further noted that Ukrnafta did not contest being bound by the arbitration clause in that Agreement that moved the venue of the proposed arbitration proceeding to Stockholm, a transfer that Ukrnafta did not contest for more than a year.
Standard of Review as Secondary Jurisdiction. The Court then turned to a consideration of the award itself, beginning with its determination of the United States’ status as a “primary” or “secondary” jurisdiction. To the Court, Sweden had primary jurisdiction since Stockholm was the seat of the arbitration. Swedish law therefore was the applicable law of the arbitration as well, based upon the presumption that the place of the arbitration designates the law under which the award has been made.
The Court thus stated that the U.S. had secondary jurisdiction. With such a status, an American court could only assess whether the award could be domestically enforced, not whether the award should be annulled. The Court further noted that as the court in a secondary jurisdiction, it could refuse to enforce the award solely on the bases listed in Article V of the Convention. As to such bases, the Court further noted that it was obliged to construe defenses to enforcement narrowly to encourage international arbitration award recognition and enforcement.
Claim of Non-Recognition Under Article V(1)(a) For Lack of Capacity. The Court then turned to Ukrnafta’s first substantive challenge to recognition of the award under Convention Article V(1)(a). Article V(1)(a) states that non-recognition can be supported by a showing that a party to the applicable agreement was under some incapacity, or that such agreement was not valid under the law deemed applicable by the parties, or the law of the country where the award was issued. The cornerstone of Ukrnafta’s argument under this section was Carpatsky’s alleged incapacity to enter into a valid agreement.
In taking up this point, the Court prefatorily noted that the challenge actually raised two issues: existence of an agreement; and validity of an agreement. Turning to Ukrnafta’s arguments, the Court opined that its challenge to Carpatsky’s capacity to sign the agreement focused entirely upon the fact that at the time of the signature in question, Carpatsky’s corporate representative used the Texas corporate seal (rather than a Delaware corporate seal) when signing the 1998 JAA amendment.
As a matter of Delaware law, the Court found use of this seal to be irrelevant, characterizing Ukrnafta’s challenge as outdated for more than one hundred years. It therefore held that Carpatsky’s corporate representative had authority to sign the 1998 amendment as president of Carpatsky, that the agreement properly identified the Carpatsky entity by name, and that the agreement made no other reference to the non-existent entity. The Court thus upheld the arbitration tribunal’s ruling about the validity of the document.
In so doing, the Court further stated that it considered Ukrnafta to have waived this challenge because it had voluntarily submitted to the jurisdiction of the Stockholm tribunal, a venue to which it would not have been bound if it had legitimately felt there were no valid arbitration in the first place.
The Court assessed waiver upon the principle that in light of Ukrnafta’s voluntary participation in the Stockholm proceeding, it could not wait to see how an arbitration tribunal ruled before deciding whether to challenge its jurisdiction. Probing further, the Court also stated that Ukrnafta’s agreeing to arbitrate in Stockholm may have constituted an independent agreement to arbitrate, a principle well-established in domestic arbitrations, and to the Court no less applicable to international commercial arbitration.
In opining about the waiver issue, the Court emphasized that Ukrnafta could not have misunderstood the basis upon which Carpatsky was pursuing arbitration, because the cover of its arbitration demand identified it as domiciled in “Delaware, United States,” with supporting documentation describing it as “a company incorporated and organized under the laws of the State of Delaware, U.S.A.” The Court also noted that when submitting its statement of defense to this arbitration, Ukrnafta consented on this point in its answer and did not contest jurisdiction.
The Court thus concluded that Ukrnafta’s Article V(1)(a) defense failed.
Claim of Non-Recognition Under Article V(1)(b) For Inability to Present Case. Article V(1)(b) of the Convention permits non-recognition of an award where “a party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case.” Ukrnafta also invoked Article V(1)(b) in its appeal, asserting that an American court could not enforce the award because Ukrnafta was allegedly “unable to present [its] case.”
The Court interpreted Article V(1)(b) as ensuring award enforcement only if the arbitration process afforded parties basic due process rights they would have received in the jurisdiction where enforcement is sought. The Court opined that in a suit for enforcement in the United States, this standard meant providing the parties minimum procedural safeguards of “adequate notice, a hearing on the evidence, and an impartial decision.”
The Court emphasized that such a standard did not incorporate procedures contained in the Federal Rules of Civil Procedure, nor did it require an arbitrator to allow all evidence, but rather required an arbitrator to admit sufficient evidence to avoid prejudicing a party’s right to a fair hearing.
Applying this standard, the Court determined that Ukrnafta’s process complaints came nowhere close to due process violations. The record indicated that the tribunal had conducted multiple hearings, that the parties had submitted witness statements, expert reports, and multiple rounds of briefing before and after the hearing, and most tellingly, that the merits hearing had lasted four days with fifteen witnesses. Additionally, the record indicated that the tribunal had permitted Ukrnafta to present some damages evidence after the evidentiary hearing had concluded.
The Court went on to state that the tribunal’s ruling that the JAA’s limitation of liability was unenforceable did not offend basic notions of due process. It determined that both parties had the opportunity to present full briefing on the legal questions presented, and that the tribunal’s ultimate decision that Carpatsky was entitled to recover lost profits, while understandably unpalatable to Ukrnafta, did not emanate from the deprivation of a fair process.
Accordingly, the Court rejected Ukrnafta’s challenge to the award under Article V(1)(b).
Claim of Non-Recognition Under Article V(1)(c) For Damage Award Not Tracking Either Party’s Proposed Amount. Ukrnafta also invoked Article V(1)(c) in its challenge to the award. This Article permits a challenge to recognition of an award when the award “deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration.” Ukrnafta contended that the tribunal awarded damages in an amount different from what either party had proposed.
The Court gave this complaint short shrift. It determined from a review of the record that the economic environment in which the events occurred leading to the claimed losses was unpredictable, and further that the model ultimately relied upon by the tribunal was presented by one of Ukrnafta’s own experts. It further emphasized that under applicable law, a factfinder is not limited to a party’s damage calculations, but is entitled to calculate its own damages based upon the record before it.
The Court therefore concluded that Ukrnafta’s Article V(1)(c) attack on the amount of the award was really a merits challenge, not a due process challenge, and it was without merit because the Court concluded that failed to identify anything about the arbitration that was fundamentally unfair.
Claim of Non-Recognition Under Article V(1)(c) Arising from Procedural Defects. Ukrnafta further invoked Article V(1)(c) of the Convention to contend that award enforcement was precluded because the award allegedly did not fall “within the terms of the submission to arbitration,” or contained “decisions on matters beyond the scope of the submission to arbitration.” Ukrnafta based this challenge on the theory that the terms of submission had disregarded the limitation of liability clause.
The Court construed the wording of Article V(1)(c) as narrow in scope, intended to cover challenges premised upon a tribunal resolving disputes beyond those submitted by the parties. The Court therefore again found Ukrnafta’s challenge to be an invalid merits challenge, because it was premised upon Ukrnafta’s argument that the tribunal had erred in interpreting Ukrainian law when determining that the limitation of liability clause was unenforceable in cases of intentional breach.
Claim of Non-Recognition Under Article V(1)(d) Arising from Composition of Arbitral Authority. Ukrnafta also invoked Article V(1)(d) to challenge the award. Article V(1)(d) precludes award enforcement where the “composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.” The Court rejected this contention out of hand, characterizing it as merely Ukrnafta’s rehash of the argument that Carpatsky-Delaware was never a party to the JAA amendments, leaving only the original agreement to arbitrate in Ukraine, an argument the Court held to have been waived.
Claim of Non-Recognition Under Article V(2)(b) as Contrary to Public Policy. As a final basis for non-recognition of the award under the Convention, Ukrnafta invoked Article V(2)(b) to contend that recognition of the award would be “contrary to the public policy” of the United States, as the enforcing country. It premised this argument upon the disrespect it asserted an American court would be showing to the Ukrainian court that had declared the 1998 JAA amendment invalid, and to Ukrainian law which forbade enforcement of a contract that its court had deemed illegal.
The Court construed Article V(2)(b) to permit non-recognition on a narrow ground, where enforcement would violate the forum state’s most basic notions of morality and justice. It specifically disavowed any authority by the United States, as a court of secondary jurisdiction, to apply American law in another country. It further emphasized that it was obliged to avoid a result that would appear to favor one country’s (Ukraine’s) home courts at the expense of a neutral country’s (Sweden’s) adherence to appropriate process and procedure in conducting the arbitration in Stockholm.
It therefore held that Ukrnafta’s Article V(2)(b) challenge failed.
Claim of Non-Recognition Under “Manifest Disregard” Theory. Finally, Ukrnafta asserted non-recognition on the basis of the tribunal’s alleged “manifest disregard” of Ukrainian law on limitations of liability. The Court rejected this extrapolation of a common law standard into Article V, because of the principle that the Convention only permits refusal of award enforcement on grounds specified in Article V.
In so doing, the Court additionally noted that it had previously rejected “manifest disregard” as an improper non-statutory basis for vacating a domestic arbitration award, and that it found no reason to permit such a ground of non-recognition for an international arbitration award. This narrow reading of Article V seemed particularly appropriate to the Court, given what it characterized as the inability of a secondary jurisdiction to second guess the merits rulings of the arbitration tribunal the parties had selected.
The Court therefore confirmed the award. It also held that the state court tort claims initiated by Ukrnafta were barred by the doctrine of claim preclusion, given the overlapping factual nucleus of both contract and tort claims, the evidence presented by the same parties in the arbitration, and the submission of the dispute before a court with jurisdiction that entered a final award on the merits.
The Fifth Circuit’s decision in OJSC Ukrnafta v. Carpatsky Petroleum Corporation marks its most comprehensive analysis of the New York Convention’s Article V defenses in many years. It also marks the Court’s first invocation of the principle that being unmentioned in the Convention, the “manifest disregard” doctrine will not support a challenge to an international arbitration award. The decision highlights the challenges confronting a party challenging an international award under Article V.
Lionel M. Schooler is a management-side employment lawyer and recognized authority on employment law, federal appellate practice, and arbitration. Lonnie’s employment practice focuses on counseling clients and litigating, on a nationwide basis, claims under all employment laws, wage and hour claims, and investigations by the Equal Employment Opportunity Commission, the U.S. Department of Labor, and the Texas Workforce Commission. Lonnie is also experienced as an arbitrator on the Commercial and Employment Panels of the American Arbitration Association and as an advocate. He was selected for inclusion by the National Association of Distinguished Neutrals and is certified as a Fellow of the Chartered Institute of Arbitrators for international arbitration matters. Since 2017, Lonnie has served on the Board of Directors of the Houston Bar Association. His previous editorial experience includes serving as editor-in-chief of The Houston Lawyer, a bimonthly publication of the Houston Bar Association.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.