Collecting the award starts with the beginning of the cross-border transaction, franchising or otherwise. By building a strong foundation for enforcement of the contract, the existing but inadequate legislation and case law can be used to successfully collect foreign awards.

Draft With Enforcement in Mind

You are negotiating a transaction with a company that will be performing where you cannot watch it every day, perhaps even in a country that would be hostile to your client. Best practices would suggest that you conduct a background search on the principals of your counterparty. Assuming that no obvious character flaws are evidence, consider whether the counterparty has the demonstrated ability to perform, including the financial wherewithal. Make sure there is a financial representation as to their existing financial strength that serves as an inducement to the contract. Then, make sure that your contract provides a covenant that their financial condition will not deteriorate. We want the counterparty to represent that it will always be just as strong and will not engage in reckless borrowing during the performance phase of the contract.

These covenants of financial strength and nondeterioration give you the basis to ask for relief in the event tempers raise and the cash balances falls. When the disputes occur, balance sheet deterioration not attributable to your transaction may well support emergent relief as will be discussed below.

Ask for guarantees or third-party security before the dispute or during the relationship. Your counterparty will understand that you do not want to chase them for payment in a foreign country. You can ask for personal guarantees, third party guarantees or other security. The form of security could be an escrow account, a hold back of payments like a retainage, or performance bonds or letters of credit to be paid upon the occurrence of a certain contingency.

Sometimes the need for guarantees or security springs up during the performance of the contract. No prohibition exists on requesting additional guarantees, security or financial reporting when these events occur. Remember that we have a baseline of financial wherewithal and a no deteriortation covenant. This additional security may allow the parties to return to the status quo ante of financial strength.

Draft with arbitration in mind, because it has advantages over the national courts. The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) puts international arbitral awards on a higher level than court judgments. The convention provides very limited grounds for challenge of an award. None are mandatory, so even if one the grounds exists, it does not automatically result in the award being set aside. No similar uniform law exists for the recognition of judgments in the world, although the EU will recognize a judgment rendered by another EU member. Arbitration is just the most expedient method for dispute resolution between foreign entities.

One the award is confirmed as a judgment, however, you must rely on the national court system to enforce the local judgment.

After the Arbitration or Lawsuit Is Filed

Once filed, a party may seek interim relief and protective measures to ensure the reimbursement of legal fees and costs in the proper case. The likelihood of such interim relief is not only fact dependent, but also forum dependent. The showing to succeed on such a request is high, but becoming more and more common, especially in the environment of project companies and litigation funders. Obtaining security for costs is one method of recovering costs of defense and proceeding.

Arbitral Tribunals Can Require Security

Most arbitration providers allow orders establishing security for costs as a matter of interim relief, but others have specific rules. The International Centre for Dispute Resolution (ICDR) provides for the availability of security for costs under Article 24 (2) of its rules. The London Court of International Arbitration (LCIA) rules provide express authority to award security to costs and claims, as do the Singapore International Arbitration Centre (SIAC) Rules. More commonly, the authority of the tribunal to order an advance for security is implicit in the power of the tribunal to grant interim measures.

Third party funding finances an arbitration case in return for a portion of the proceeds awarded in the financed party's favor. The funder may expect to receive a percentage of the damages awarded or a multiple of the cost of arbitrating. Third party funding is becoming more common in international arbitration, and as a result, more orders requiring security for costs are being entered.

Look to Interim Relief From the Courts

New York law provides for a provisional remedy in CPLR 7502(c) for a temporary attachment or preliminary injunction against counterparties with assets in New York to secure any future recovery. Article 7502(c) only applies to an arbitration that is “pending or that is to be commenced” and expires presumptively if the arbitration is not commenced within 30 days, absent court order, see Wright, O., “How to Ensure That Your Foreign Arbitral Award is Collectible,” New York Law Journal (Oct. 13, 2017).

Perform Asset Investigation

The purpose of performing an asset investigation at this stage is to assess whether recovery is possible, and to track the movement of any assets. The adverse party can be requested voluntarily to produce its financial statements so that an application for security of costs and claims need not be brought. In the event that request is rejected, it may be possible if good cause is shown to have the tribunal require the statements be produced if there is some reason to believe that any award not be satisfied. It is possible that the contract between the parties requires current financial statements to be produced.

Getting Paid After the Award Is Rendered

• Demand payment and enforce the award

Arbitration providers generally end their involvement upon rendering a final award. The rules do not provide mechanisms for enforcement of awards. Enforcement is accomplished through the national courts. Most arbitral awards are governed by two international treaties, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and the Inter-American Convention on International Commercial Arbitration (Panama Convention). The New York Convention is adopted by 149 countries and the Panama Convention is adopted by 14 Latin American countries. Payment demand is not a prerequisite to enforcement.

In the United States, a party to a commercial arbitration issued by a foreign arbitrable tribunal may confirm an award in federal court. 9 U.S.C. section 207. The Federal Arbitration Act streamlines enforcement of arbitral awards from signatories from the New York Convention and the Panama Convention. 9 U.S.C. Section 201-208, 301-307. These procedures apply where at least one party is not a citizen of the United States, otherwise you may use the Federal Arbitration Act (FAA). The FAA will also apply to cases where none of these conventions apply, or when the Convention on the Settlement of Investment Disputes Between States in Nationals of Other States (the ICSID Convention) applies in treaty cases.

Any party to the arbitration may file an application to confirm an award within three years, 9 U.S.C. Section 207. A court must confirm an award unless it finds one of the grounds for refusal contained in the convention. 9 U.S.C. Section 207. The grounds for refusal include public policy prohibitions, incapacity of the parties, invalidity of the agreement, due process or procedural deficiency, awards beyond the scope of power of the arbitrators, or corruption of an arbitrator.

Once an award enters judgment confirming an award, the judgment may be enforced as any other judgment rendered in a civil case. 9 U.S.C. Sections 13 and 208. The Federal Rules of Civil Procedure provide that federal courts have all the weapons of state courts in enforcement:

Rule 64. Seizing a Person or Property

• Remedies under state law—in general

At the commencement of and throughout an action, every remedy is available that, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment. But a federal statute governs to the extent it applies.

• Specific kinds of remedies

The remedies available under this rule include the following—however designated and regardless of whether state procedure requires an independent action:

• Arrest.
• Attachment.
• Garnishment.
• Replevin.
• Sequestration.
• Other corresponding or equivalent remedies.

State law allows broad supplementary rights, which can be enforced by in federal court as well. Notably, New York CPLR 6201(5) authorizes attachment in actions involving enforcement of foreign judgment, see Wright, regarding need to confirm foreign awards to judgment before execution proceedings occur.

Other countries have additional remedies which can be useful. In China, enforcement of civil courts can include restrictions on exiting China, publishing the obliged parties' obligation to perform, and where a party disobeys an order, fines or detention.

Conclusion

Arbitration awards stand as strong as any national judgment and are no less weak than the enforcement of any obligation in that country. Getting an early start on the process during the contract drafting stage will advance the likelihood of collection.

Craig R. Tractenberg, a partner at Fox Rothschild, handles complex business disputes involving intellectual property, licenses, business torts and insolvency issues. He focuses on franchise companies' development and expansion. Contact him at [email protected].