U.S. Court Raises Barrier to Enforcing Arbitration Awards Against Foreign State-Owned Enterprises
The U.S. District Court in the District of Columbia recently denied a petition to recognize and enforce an international arbitration award against a government-owned airline on jurisdictional grounds. The decision in UAB Skyroad Leasing Inc. v. OJSC Tajik Air, 20-cv-0763 (D.D.C. Jan. 26, 2021) illustrates the hurdles to enforcing an arbitral award against a foreign state-owned enterprise, even when that enterprise is engaged in pure commercial activities and controlled by the state.
The decision revolved around whether OJSC Tajik Air, an entity wholly owned by the Government of a Tajikistan, was sufficiently separate from the government to be entitled to U.S. Constitutional protections. Foreign governments are not considered “persons” entitled to U.S. Constitutional protections. In the context of a proceeding to enforce a foreign arbitral award, the fact that a foreign state is not a “person” for the purposes of the Constitution means that the court can exercise jurisdiction and the action can proceed against a foreign government even if the government has no presence or property in the U.S. jurisdiction. The same is not true with respect to an agency or instrumentality of a foreign government. An agency or instrumentality is presumed to be separate from the government and therefore a “person” for Constitutional purposes. To enforce a foreign arbitral award an agency or instrumentality of a foreign government, a party seeking to enforce the award must either demonstrate that the agency has a presence or property in the jurisdiction, or that: 1) the government exercises complete domination over the entity, 2) there is a principal-agent relationship, or 3) separate treatment would work a fraud or injustice.
The UAB Skyroad decision applies the test in a way that makes it very difficult to pass. UAB Skyroad initiated arbitration in Lithuania after Tajik Air fell behind on lease payments for two Boeing aircraft and would not return them. UAB Skyroad prevailed in the arbitration and brought its award to D.C. for recognition and enforcement on the basis that Tajik Air is part of the Tajik government. Tajik Air is 100% owned by the Republic of Tajikistan, the government makes hiring and firing decisions over the director, and the airline is overseen by a supervisory board of government officials. The Tajik government also decides when to acquire new aircraft and on what financing terms, determines when to issue dividends, and passed legislation to provide tax relief to Tajik Air’s creditors. Tajik Air was represented in the arbitration proceedings by counsel for the Tajik Ministry of Transport, which challenged the tribunal’s jurisdiction on the basis that the airline was a state enterprise.
Nevertheless, the federal court in D.C. found that there was no evidence of that the government of Tajikistan exercised the kind of day-to-day control that it deemed necessary to recognize Tajik Air as the equivalent of the government. Because Tajik Air was separate from the government, it was entitled to Constitutional protections. Such protections preclude the exercise of jurisdiction over Tajik Air unless it had property or some continuing presence in the District. This may not, however, be the last word on the subject, since UAB Skyroad may decide to appeal the decision to the U.S. Court of Appeals for the D.C. Circuit.
The District of Columbia federal courts have statutory jurisdiction over all cases involving sovereign states, so its case law is well-developed and trends restrictive. Not all districts are as rigid about the criteria used to find agency sufficient for personal jurisdiction. In a similar case, our firm represented Super Perfect Investments, Ltd. in its effort to obtain recognition of a $24.5 million arbitral award against AgroinvestBank OJSC (“AIB”). AIB is a Tajik bank that is majority-owned by the government. It issued guarantees for a cotton contract brokered and approved by the Tajik government. AIB did not enter an appearance in the recognition proceeding to oppose the petition, and the U.S. District Court for the Southern District of New York granted it. See Super Perfect Investments, Ltd. v. Agroinvestbank OJSC, No. 20-cv-5552 (S.D.N.Y. Aug. 25, 2020).
Super Perfect had a factor absent from the UAB Skyroad: it established that AIB maintained a correspondent banking relationship with Citibank in New York, and that account was used in the contract that gave rise to the arbitration. The existence of a judgment debtor’s property in the jurisdiction provided an independent basis for seeking enforcement of an award in a particular jurisdiction (and increased the likelihood that the award would be satisfied).
It is unclear whether UAB Skyroad signals a further tightening of the standard for piercing through to sovereign states, but judgment creditors should consider presenting alternate bases for personal jurisdiction in their petitions for recognition and should look for jurisdictions where the debtor is likely to have assets; frequently, that will be a New York bank account. Judgment creditors should consider obtaining information concerning U.S. assets owned by the instrumentality in advance of filing.
When determining whether and how to seek recognition and enforcement of a foreign arbitral award in the United States, parties should seek the advice of experienced counsel.
For further information please contact:
- Tara J. Plochocki at firstname.lastname@example.org or +1.202.659.7217
The foregoing is for informational purposes only. It is not intended as legal advice and no attorney-client relationship is formed by the provision of this information.