United States: International Dispute Resolution Update: May 2011 - Part 2

Effect of Forum Selection Clause on Action to Enforce Arbitral Award: Zeevi Holdings, Inc. v. Rep. of Bulgaria, 2011 WL 1345155 (S.D.N.Y. Apr. 5, 2011)

Zeevi concerned the effect of a forum selection clause on a proceeding to enforce an international arbitration award. The petitioner, Zeevi (an Israeli company) and a partner sought to purchase the Balkan Airlines, the Bulgarian national airline. The relevant agreement provided that any dispute would be subject to mandatory arbitration in Paris under the UNCITRAL Rules. The agreement also provided, however, that the award would be final and binding, though it also provided that "[t]he execution of an award against the Seller [Bulgaria] may be conducted only in Bulgaria in accordance with the provisions of Bulgarian law."

A dispute ultimately arose, and Zeevi won an arbitration award worth approximately $10.3 million. Bulgaria, which claimed a defect in arbitral jurisdiction, failed to pay the award. Zeevi successfully sought confirmation of the award in the courts of Israel, which held, as a matter of Israeli law, that the clause requiring any proceeding to execute an award against the Seller to be commenced in Bulgaria did not preclude Zeevi from seeking to enforce the award in other jurisdictions. Zeevi then commenced an enforcement proceeding in New York under the New York Convention. The New York court saw things differently.

The New York court conducted two separate analyses. First, it considered whether forum selection clauses are enforceable under the New York Convention, which expressly contemplates and permits an award creditor to prosecute multiple, simultaneous proceedings in the courts of signatory nations. Noting that the defenses to enforcement set forth in Article V of the New York Convention are exclusive, the court drew an analogy to the Second Circuit's decision in Monegasque De Reassurances S.A.M. v. Nak Naftogaz of Ukraine ("Monde Re"),²⁴ in which the Court of Appeals held that while the Article V defenses are the only substantive defenses that may be raised in opposition to the enforcement of an arbitral award, U.S. courts are entitled to refuse to enforce an award based on procedural grounds that are not set forth in the Convention, provided that the procedural rules applied in New York Convention cases are not "substantially more onerous" than those applied in domestic cases.²⁵ Taking note of Second Circuit authority holding that questions relating to the enforceability of forum selection clauses "are essentially procedural, rather than substantive, in nature,"²⁶ and further that American courts will enforce forum selection clauses in cases involving domestic arbitral awards, the district court concluded that it could enforce a forum selection clause without running afoul of the New York Convention.²⁷

Having found that the forum selection clause could be enforced consistently with the New York Convention, the court next analyzed its scope and whether it should be enforced. The court applied the four-part test, set forth in Phillips v. Audio Active,²⁸ that requires a court to consider (i) whether the clause was reasonably communicated to the party resisting enforcement; (ii) whether the clause is mandatory; (iii) whether the clause applies to the dispute before the court; and (iv) whether, if the first three prongs are satisfied, the party resisting enforceability has overcome the presumption of enforceability by showing that enforcing the clause would be unreasonable or unjust, or that the clause is invalid.

The parties agreed that the first two factors were satisfied, but disagreed as to the third and fourth. As to whether the clause applied to the parties' dispute, the court found that it did, rejecting Zeevi's argument that because the clause referred to the "execution" of arbitral awards, awards could be enforced in courts outside Bulgaria, but not executed. On this point, the court found that Zeevi's argument, if accepted, "would lead to the nonsensical conclusion that, by remaining silent on an 'enforcement' provision, Respondent essentially consented to being haled into courts throughout the world so that Petitioner could accumulate judgments that would have legal effect only in Bulgaria."

Finally, the district court turned to the question of whether Zeevi had rebutted the presumption of enforcement by demonstrating that the clause was invalid, unreasonable, or unfair. The court found that Zeevi could carry its burden by making one of four showings: (i) that the clause was incorporated by fraud or overreaching; (ii) that enforcement of the clause would deprive the objecting party of his day in court "for all practical purposes" due to "grave unfairness or inconvenience of the selected forum"; (iii) that the selected law might deprive the objecting party of a remedy; or (iv) that the clause contravenes a strong public policy of the forum state.²⁹

Zeevi attempted to carry its burden by claiming that the Bulgarian courts – its sole available enforcement venue if the clause were to be enforced – were corrupt and would not fairly consider an enforcement petition against the Bulgarian state. Specifically, Zeevi proffered evidence that Bulgarian law did not afford a procedure for enforcing awards against the state, that execution of awards "is determined freely by the financial unit of the same state entity against which the award was rendered," and also that its counsel and personnel had been subjected to harassment by the Bulgarian authorities. The court rejected this argument. Noting that the argument that "the 'alternative forum is too corrupt to be adequate' argument does not enjoy a particularly impressive track record" and that principles of comity weigh strongly against a court's declaring that the entire court system of another country is inadequate,³⁰ the court found that Bulgaria's membership in the European Union (which was predicated on certain showings about the sufficiency and integrity of its judiciary) and status as a New York Convention signatory essentially outweighed Zeevi's showings that it was unlikely to receive a fair enforcement hearing.

Zeevi is a non-precedential district court decision, and its facts are sufficiently unusual that it is unlikely to have significant impacts on New York Convention proceedings generally. The most direct lesson to be learned from the case is that a party should not agree to a mandatory provision setting an exclusive forum for enforcement of an arbitration award, particularly one in which a state counterparty insists upon litigating enforcement proceedings in its own courts. Beyond that immediate lesson, however, the court's analysis in Zeevi underscores a significant tension between two fundamental policy objectives of U.S. arbitration law: the desire to ensure that arbitration agreements are enforced in accordance with their provisions, and the desire to ensure that arbitral awards are promptly enforced. The district court's analysis in Zeevi must be seen as favoring the first of these objectives over the second, although the manner in which the case was litigated may have helped dictate the outcome. Zeevi's arguments concerning the unfairness of enforcing the forum selection clause seem to have focused almost exclusively on the unsuitability of the Bulgarian court system; as the district court observed, this is generally not a promising route to take. Taken at face value, however, the evidence proffered by Zeevi at least suggested that Zeevi's prospects for enforcing and executing the award in Bulgaria were significantly lower than they would be in the United States or elsewhere, raising the question of whether the district court's decision to enforce the forum selection clause contravened the bedrock U.S. public policy – reflected throughout U.S. courts' New York Convention jurisprudence – that favors the enforcement of international arbitration awards, through multiple proceedings if and when necessary. Refusing to enforce the forum selection clause on this ground would have vindicated the pro-enforcement policy reflected in both the New York Convention and U.S. law, with no accompanying affront to Bulgaria's sovereignty or to international comity.

Footnotes Continued

24 311 F.3d 488 (2d Cir. 2002).

25 In Monde Re, the Court of Appeals held that a petition to confirm an arbitral award under the New York Convention could be dismissed on forum non conveniens grounds.

26 Zeevi, 2011 WL 1345155, at * 3 (quoting Jones v. Weibracht, 901 F.2d 17, 19 (2d Cir. 1990)).

27 The court also took note of the Second Circuit's observation in Monde Re that allowing parties with no connection to the forum to use U.S. courts to enforce international arbitration awards could have a chilling effect on international trade. Whatever the independent logic of this observation, it is somewhat at odds with the policy underlying the New York Convention, which is designed to ensure the prompt and efficient enforcement of international arbitration agreements and awards by the courts of signatory countries; the Convention's contemplation of multiple proceedings, while surely inconvenient for parties who refuse to pay arbitral awards, clearly helps effectuate this policy, while the recognition of defenses not mentioned in Article V – even if considered "procedural" in nature – clearly impedes it.

28 494 F.3d 378 (2d Cir. 2007).

29 Zeevi, 2011 WL 1345155, at *6 (citing Roby v. Corp. of Lloyd's, 996 F.2d 1353, 1363 (2d Cir. 1993)).

30 Id. at *7 (citing Eastman Kodak Co. v. Kavlin, 978 F. Supp. 1078, 1084 (S.D. Fla. 1997)).

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