Jurisdictional Puzzles about the Enforcement of Judgments & Arbitral Awards

Two recent cases highlight unsettled questions about jurisdictional limitations on the recognition and enforcement of foreign judgements and arbitral awards.  The first, Alterna Aircraft V B Ltd. v. SpiceJet Ltd., addressed whether due process requires the presence of property in the forum state if the court otherwise lacks personal jurisdiction over the debtor.  In Alterna, the Washington Supreme Court joined a growing number of other states in holding that it does.  The second, Sociedad Concesionaria Metropolitana de Salud S.A. v. Webuild S.p.A, addressed whether due process was satisfied by the presence of the debtor’s property that was unrelated to the underlying arbitral award for which recognition and enforcement was sought. In that case, the Third Circuit held that unrelated property was enough to confer jurisdiction. Taken together, the decisions mean that the judgment-debtor must have property in forum state, if personal jurisdiction is otherwise lacking, but that that property need not have any relationship to the underlying case or arbitration.

Background

Sociedad Concesionaria Metropolitana de Salud (SCMS) won a Chilean arbitral award against Astaldi. During the arbitration, Astaldi underwent restructuring and merged part of its business into Webuild S.p.A., an Italian multinational construction company. SCMS then brought an action in the U.S. District Court for the District of Delaware against Webuild to confirm, recognize, and enforce the arbitral award, alleging that Webuild was Astaldi’s successor in interest.  SCMS invoked quasi in rem jurisdiction based on Webuild’s shares in a Delaware-based wholly owned subsidiary. The District Court held that it had no jurisdiction over a “nonresident defendant based solely on the presence of property in the court’s state that is unrelated to the action.”  The Third Circuit reversed.

Quasi in rem Jurisdiction

In Shaffer v. Heitner (1977), the Supreme Court held that the minimum contacts test of International Shoe Co. v. Washington(1945) applied to assertions of jurisdiction based on the presence of the defendant’s property in the forum state.  The minimum contacts test requires that the claim arise out of or relate to the defendant’s contacts with the forum state. In cases involving property in the forum, courts must, in other words, evaluate the relationship between the defendant’s property (which is a contact with the forum state) and the plaintiff’s cause of action. The mere presence of property alone does not confer jurisdiction over the defendant.

Applying this analysis, the District Court held that SCMS “failed to establish minimum contacts between Delaware, the underlying breach-of-contract action, and Webuild US—who was a party to neither the arbitration nor the underlying contract.” But this conclusion did not mark the end of the District Court’s analysis. Footnote number thirty-six in Shaffer says that:

Once it has been determined by a court of competent jurisdiction that the defendant is a debtor of the plaintiff, there would seem to be no unfairness in allowing an action to realize on that debt in a State where the defendant has property, whether or not that State would have jurisdiction to determine the existence of the debt as an original matter.

SCMS argued that this language allows for jurisdiction to enforce a foreign arbitral award based solely on the presence of the defendant’s property in the state. Webuild argued, and the District Court held, both that footnote was dicta and that in any case no “court of competent jurisdiction” had held that it (as opposed to Astaldi) is the debtor.

The Third Circuit reasoned, by contrast, that footnote thirty-six applied. It noted that the core problem in Shaffer was the use of property to confer personal jurisdiction over a defendant in an unrelated initial action. But in a post-judgment action, jurisdiction is invoked merely to enforce a debt that has already been adjudicated, a “fundamentally different” exercise of jurisdiction, as the footnote itself points out.  The Third Circuit also noted that enforcement actions based on the attachment of property are a traditional exercise of jurisdiction and that “the Supreme Court has cautioned litigants and lower courts against ‘(mis)reading Shaffer as suggesting that International Shoe discarded every traditional method for securing personal jurisdiction that came before.’”  The Supreme Court has, to be sure, taken varying approaches to traditional bases for personal jurisdiction, accepting them for “tag jurisdiction” and “consent” but rejecting them in most quasi in rem contexts, as in Shaffer itself.

In any event, the text of footnote thirty-six, the policy reasons that support it, and its status as a traditional basis for jurisdiction, all support the appellate court’s decision.

Judgments vs. Arbitral Awards

Footnote thirty-six of Shaffer addressed money judgments by sister states, but for several reasons the Third Circuit concluded that its logic also applied to foreign arbitral awards. A court that is asked to enforce either a domestic or foreign money judgment will refuse to do so if the court that rendered the judgment lacked personal jurisdiction over the defendant.  Similar safeguards apply for arbitral awards, which are only valid if the parties consented to the arbitration, and which may also be challenged on grounds such as invalidity under the laws of the country where it was issued.  Second, beyond these narrow defenses, courts have a very limited role in declining to recognize and enforce foreign arbitral awards, just as they have a limited role with respect to declining to enforce money judgments by sister states.  In both situations, the enforcement action is complementary and ancillary to the initial judgment or arbitral award, and in neither is the enforcing court asked to review the merits of the underlying claim.  Third, the court noted that the adoption and implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) evinced a federal policy in favor of the enforcement of arbitral awards in a “scheme that closely resembles the Full Faith and Credit Clause and to which the logic of Shaffer’s thirty-sixth footnote comfortably extends.”

Conclusion

It is somewhat surprising that such foundational questions about enforcement actions, property, and personal jurisdiction have not yet been resolved clearly. As Bill Dodge has explained, recent cases such as Alterna Aircraft are increasingly requiring the presence of property in the forum state if no other basis for personal jurisdiction exists.  Now the Third Circuit has sensibly held in Sociedad Concesionaria Metropolitana de Salud both that the property need not be related to the underlying judgment and that foreign money judgments and arbitral awards subject to the New York Convention should be treated (for these purposes) like sister-state money judgments. Hopefully these two cases point towards clearer jurisdictional rules in this area.