Arbitration in the Courts

March 2021 | Vol. 5
Where Advocacy Meets Business

Delaware Supreme Court holds that under the FAA courts have jurisdiction to enjoin a second arbitration that collaterally attacks a prior arbitration award.

Second arbitration seeking to recoup amounts awarded in prior arbitration was an impermissible attempt to circumvent the Federal Arbitration Act’s exclusive framework for challenging arbitral awards.

Gulf LNG Energy LLC v. Eni USA Gas Marketing LLC, No. 22-2020, ___ A.2d ___ (Del. Nov. 17, 2020).

In Gulf LNG, the Delaware Supreme Court held that a second arbitration, which seeks to recover amounts paid under a prior arbitral award or to redress alleged irregularities in the prior arbitration, constitutes an impermissible collateral attack on the prior award.  Under those circumstances, the second arbitration circumvents the Federal Arbitration Act’s (FAA) time limits and procedures, which provide the exclusive means for vacating, modifying or correcting an arbitral award.  The Delaware Supreme court therefore upheld the Chancery Court’s jurisdiction to enjoin the second arbitration and expanded the scope of the injunction granted by the lower court.

Gulf LNG Energy, LLC (Gulf) owns and operates a liquefied natural gas terminal in Pascagoula, Mississippi.  Gulf entered into a Terminal Use Agreement (TUA) with Eni USA Gas Marketing LLC (Eni), under which Eni agreed to pay Gulf LNG certain fees to receive, store, regasify and deliver Eni USA’s imported liquefied natural gas to its downstream customers.  The TUA included an arbitration clause requiring the parties to arbitrate any disputes arising out of or related to the TUA.

In March 2016, Eni filed for arbitration (the First Arbitration) with the American Arbitration Association’s International Centre for Dispute Resolution (ICDR), seeking a declaration that the TUA was terminated because its purpose had been frustrated by the unforeseen increase in U.S. shale gas production, which made the importation of liquefied natural gas “economically irrational and unsustainable.”  Eni also argued that it was entitled to terminate the TUA because Gulf breached certain warranties that it would not engage in other liquefaction and distribution activities.  In June 2018, the tribunal (the First Tribunal) issued a Final Award finding that the principal purpose of the TUA had been frustrated.  In its award, the First Tribunal declared the TUA terminated as of March 1, 2016, and ordered Eni to pay Gulf in excess of $462 million as compensation for the value of Gulf’s partial performance of the TUA as of the termination date. The First Tribunal did not reach Eni’s breach of contract claims, on the ground that its frustration finding rendered those claims moot.  In February 2019, following Gulf’s and Eni’s cross-petitions for confirmation, the Delaware Chancery Court confirmed the First Award.

In June 2019, Eni commenced a second arbitration (the Second Arbitration) seeking two counts of declaratory relief and damages for Gulf’s alleged breach of the TUA based on Gulf’s same alleged liquefaction and export activities Eni had claimed in the First Arbitration constituted a violation of certain warranties in the TUA.  Eni also asserted a claim for negligent misrepresentation seeking declaratory and monetary relief “as a result of Gulf’s wrongful conduct” in the First Arbitration.

Gulf petitioned the Delaware Chancery Court to permanently enjoin the Second Arbitration.  Although the Federal Arbitration Act (FAA) does not expressly provide for such relief, the Chancery Court held that it had jurisdiction to enjoin the Second Arbitration to the extent it sought to collaterally attack the first arbitration outside the FAA’s exclusive review process for challenging an arbitral award.  The Chancery Court held that Eni’s negligent misrepresentation claim constituted such a collateral attack on the First Award, because it sought to “claw back” some of the damages awarded by the First Tribunal in its Final Award.  The Chancery Court, however, declined to enjoin Eni’s breach of contract claims in the Second Arbitration.  It held that these claims did not seek to collaterally attack the First Tribunal’s award, because that tribunal had declined to rule on these claims in light of its finding that the TUA had terminated for frustration of purpose.

On appeal, the Delaware Supreme Court affirmed the Chancery Court’s holding that it had jurisdiction to enjoin the Second Arbitration.  But the appellate court held that the Chancery Court should have enjoined the Second Arbitration in its entirety.

Eni argued that that question turned on principles of res judicata and collateral estoppel, and should therefore be left to the arbitrators in the Second Arbitration.  According to Eni, this was because the parties’ arbitration clause was broad, delegating issues of arbitrability to the arbitrators in the Second Arbitration.  The court agreed in principle that questions of res judicata and collateral estoppel are questions of arbitrability for the second tribunal.  But courts are nevertheless permitted to “intervene if the ‘ultimate objective . . . is to rectify the alleged harm’ a party suffered from an unfavorable arbitration award ‘by attempting to arbitrate [its] claims in a separate arbitration proceeding.’”  Thus, the court emphasized that the collateral attack doctrine does not “separately consider the question of arbitrability,” and its ruling did not conflict with the usual rule that it is for the arbitrators, and not the court, to determine preclusion issues such as res judicata or collateral estoppel.  Rather, it ruled only that allowing a second arbitration to seek redress for determinations made on the merits in a prior arbitration would allow the claimant to evade the FAA’s three-month “jurisdictional time limit for challenging the award” and “undermines the FAA’s goal of a prompt, limited, exclusive, and final means to review an arbitration award.”

In its notice of arbitration in the Second Arbitration, Eni had stated that it sought to recover “the amounts that Eni has had to pay to Gulf [under the First Tribunal’s award] for Gulf’s purported decommissioning of the Pascagoula Facility . . . .”  The court held, therefore, that both the negligent misrepresentation and the breach of contract claims “sought to recoup as damages the amount it paid in restitution” under the First Tribunal’s award, and therefore Eni’s “ultimate objective” was to “rectify the alleged harm [Eni] suffered in the first arbitration.”

The “fundamental reasons why courts redress collateral attacks on arbitration award [is] to prevent end runs around the exclusive FAA review process.”  “If [Eni] was dissatisfied with the result [in the First Arbitration], or was entitled to other relief, it could have sought review under the FAA.”

Read the court’s full decision here.


Courts’ jurisdiction over enforcement action under FSIA’s arbitration exception is distinct from questions concerning the arbitrators’ jurisdiction.

U.S. courts have jurisdiction to hear petition to confirm award against foreign sovereign even where arbitrability is disputed.

LLC SPC Stileks v. Republic of Moldova, No. 19-7106 (D.C. Cir. Jan. 15, 2021).

The successor to a Ukrainian company called Energoalliance commenced an action in federal district court in Washington D.C. to enforce an arbitration award for nearly $60 million against the Republic of Moldova.  The arbitration had been brought under the Energy Charter Treaty (ECT), a 1994 multilateral agreement signed by Moldova and Ukraine, among others.  The district court entered judgment enforcing the award.  Moldova appealed to the United States Court of Appeals for the District of Columbia Circuit, which affirmed the district court’s decision recognizing the award.

The principal question on appeal was whether the district court had jurisdiction over petitioner’s claim under the Foreign Sovereign Immunities Act (FSIA).  The FSIA is a federal statute that provides the exclusive basis for obtaining jurisdiction over claims against foreign states in U.S. courts.  Under the FSIA, foreign states are generally entitled to sovereign immunity, unless one of the enumerated exceptions to immunity set forth in the FSIA applies.  Under the FSIA’s “arbitration exception,” foreign states are not entitled to immunity in any action to enforce an arbitration agreement or award if the “award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.”  To establish jurisdiction under the arbitration exception, the claimant need only demonstrate the existence of an arbitration agreement, an arbitration award and a treaty governing the award.

Here, the petitioner sought to enforce the award against Moldova under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), and asserted jurisdiction under the FSIA’s arbitration exception.  Moldova argued that the FSIA’s arbitration exception was inapplicable because Energoalliance’s particular claims were not covered by the ECT.  In particular, Moldova argued that the ECT and its arbitration provision only covered certain qualified investments, and Energoalliance’s had not made such an investment because it had not contracted directly with Moldtranselectro, the Moldovan state-owned entity.  Rather, it had entered into a series of agreements pursuant to which Ukrenegro, a Ukrainian state-owned utility, sold electricity to Energoalliance, who in turn sold it to a British Virgin Islands entity called Derimen.  It was Derimen that sold electricity to Moldtranselectro.  Energoalliance had structured its investment this way to avoid certain Ukrainian currency controls.  But Energoalliance assumed the risk of Moldtranselectro’s non-payment, and Derimen had assigned its claims for non-payment against Moldtranselectro to Energoalliance.  According to Moldova, because the direct seller, Derimen, was a BVI entity, the contract with Moldtranselectro was not a qualified investment under the ECT, and therefore the tribunal had lacked jurisdiction under the ECT to issue the award.  As the court put it, Moldova’s argument was that “[a]lthough the ECT may establish that Moldova agreed to arbitrate certain disputes, it does not prove that it agreed to arbitrate this particular dispute.”  In other words, Moldova argued that, because the dispute was not arbitrable under the ECT, the FSIA arbitration exception did not apply.

The court rejected this argument, reasoning that Moldova “conflates the jurisdictional standard of the FSIA with the standard for review under the New York Convention.”  Because the FSIA provides an exception to immunity whenever a claim concerns the enforcement of an award that “may be governed by a treaty” such as the New York Convention, “the arbitrability of a dispute is not a jurisdictional question under the FSIA.”  Moldova’s contention that the dispute was not arbitrable did not go to the court’s jurisdiction under the FSIA; it merely raised a substantive defense to enforcement under Article (1)(c) of the New York Convention, which the court had jurisdiction to decide.

Turning to the question of arbitrability, the critical question was whether the court should review the issue de novo or defer to the tribunal’s determination that the dispute was arbitrable, i.e., that they had jurisdiction over the dispute.  The court held the latter.  Although questions of arbitrability are presumptively for the courts, if the parties’ agreement “clearly and unmistakably” delegates arbitrability determinations to the arbitrators, “a court possesses no power to decide the arbitrability issue.”

The court held that Moldova, as a party to the ECT, had in fact “clearly and unmistakably” delegated the arbitrability question to the arbitrators because the ECT incorporated the UNCITRAL Rules, and Article 23 of those Rules provides that the “arbitral tribunal shall have the power to rule on its own jurisdiction.”  This, the court held, was “clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”  The court rejected Moldova’s contention that the ECT’s incorporation of the UNCITRAL Rules was not controlling because Energoalliance’s claim “does not fall within the ECT.”  “The tribunal’s jurisdictional grant derived from Moldova’s signature of the treaty itself, and – under our law – it is up to the tribunal to determine what the treaty means.”  The court therefore had “no authority to delve into the merits” and override the arbitrators’ determination that they had jurisdiction over the dispute.

Although the appellate court affirmed the district court’s judgment recognizing the award, the court remanded the matter to the district court to consider whether the judgment should have been denominated in Moldovan lei instead of U.S. dollars.  U.S. courts generally issue judgments denominated in U.S. dollars.  However, in this case, it was an open question whether Moldova had a reasonable expectation that the judgment would be denominated in Moldovan lei.

In the arbitration, petitioner had requested an award in Moldovan lei.  The petitioner had again requested a judgment in lei in its November 2014 petition to confirm the award.  The first time the petitioner requested a dollar-denominated award was in December 2018, “more than five years after its first request for an award in lei and more than four years after its second such request.”  Critically over that five-year period, the lei depreciated more than 30% against the dollar.  Had petitioner originally sought a dollar-denominated award, “Moldova might have been on notice and been able to hedge against the risk of a depreciating lei.”  Allowing petitioner’s belated request for a dollar-denominated award could “let[] an arbitration winner make a riskless bet on the foreign exchange market – always requesting the initial award in local currency and then, during the course of U.S. confirmation proceedings, seeking a dollar judgment if and only if the local currency suffers relative depreciation.”  Accordingly, on remand, the district court was to consider whether petitioner’s actions “created a settled expectation on Moldova’s part” that the judgment would be denominated in lei.

Read the court’s full decision here.

Eleventh Circuit holds that director bound himself to arbitrate by signing agreement on behalf of corporation.

Under governing Venezuela law, director signing agreement on behalf of corporation also became a signatory personally bound to arbitrate.

Guarino v. Productos Roche SA, No. 20-11420 (11th Cir. Dec. 15, 2020).

In many jurisdictions, within and outside the United States, directors, officers and other corporate agents who sign a contract containing an arbitration clause in their representative capacity on behalf of the corporation are not bound to arbitrate in their individual capacity.  Guarino is a reminder that commercial rules are not the same in all legal systems.

Gerardo Guarino, a resident of Florida, was a director of Iutum Services Corp., a now-dissolved Florida corporation.  Iutum entered into a contract with Productos Roche S.A. (Roche), a Venezuelan corporation, to sell 257 units of certain electronic equipment to Roche.  Guarino signed the agreement on behalf of Iutum.  It was undisputed that Guarino signed the agreement in a representative rather than an individual capacity.

The contract contained an arbitration clause requiring any disputes arising out of the agreement to be submitted to arbitration “in the city of Caracas and in accordance with Venezuelan law, in accordance with the provisions contained in the General Law of the Arbitration Center of the Caracas Chamber. . . .”

After Roche paid Iutum for all 257 units of equipment, Iutum delivered only 138 units.  In August 2017, Roche commenced an arbitration against Iutum and Guarino before the Arbitration Center of the Caracas Chamber (ACCC) seeking to hold both liable for Iutum’s breach of the agreement.  Guarino and Iutum failed to appear in the arbitration, and the arbitrators entered a default award in November 2018, finding Iutum and Guarino joint and severally liable for approximately $175,000, plus approximately $53,000 in costs and attorneys’ fees.  When Guarino and Iutum failed to satisfy the award, Roche filed a petition to confirm and enforce the award in federal district court in Florida.

Guarino opposed recognition of the award, which both Guarino and Roche agreed was governed by the Inter-American Convention on International Commercial Arbitration (the Panama Convention), which is codified in Chapter 3 of the Federal Arbitration Act.  The substantive provisions of the Panama Convention are in all material respects identical to the New York Convention.  Guarino argued that the award failed to satisfy the Convention’s “in-writing” requirement found in Article II, which requires contracting states to “recognize an agreement in writing under which the parties undertake to submit to arbitration.”  According to Guarino, the in-writing requirement was not satisfied with respect to him because he signed the contract in his representative capacity as a director of Iutum.

The district court disagreed.  The agreement was expressly governed by Venezuelan law, and the Venezuelan Commercial Code “personally binds those who contract in the name of companies established abroad and are not duly registered in Venezuela.”  The court therefore held that Guarino was bound to arbitrate in his individual capacity and the arbitrators properly held him jointly and severally liable for Iutum’s debt under the contract with Roche. The Eleventh Circuit Court of Appeals, which has jurisdiction over appeals from the judgments of federal courts located in Florida, affirmed on this basis.

The court also rejected Guarino’s argument that enforcement of the award against him in his personal capacity violated Article V(2)(b) of the Panama Convention, which, like the New York Convention, permits an enforcing court to refuse recognition to an award that violates the public policy of the enforcing state.  Guarino argued that enforcement of the Venezuelan award against him violated public policy because Florida law provides that in the absence of grounds to pierce the corporate veil, corporate representatives or shareholders were not personally liable for corporate debts under Florida law.  Therefore, according to Guarino, an award imposing personal liability on him under foreign law is contrary to public policy and should not be enforced.

The court rejected this argument.  The agreement Guarino signed “stated it was subject to Venezuelan law on behalf of Iutum.”  Guarino therefore could not argue that the agreement “that explicitly states it is subject to Venezuelan law should now be construed according to Florida law.”  Holding Guarino jointly and severally liable under Venezuelan law to which he agreed to be bound did not offend Florida or U.S. public policy.  Rather, accepting Guarino’s argument would be contrary to “something the [U.S.] Supreme Court has expressly rejected – that only the law of the United States is adequate to resolve international disputes.”

Read the court’s full decision here.

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