US court denies enforcement of CIETAC award because notice of arbitration was in Chinese

06 Sep 2016 | 13 min read

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Steven Finizio, partner at WilmerHale, and Fan Yang, scholar-in- residence at WilmerHale, discuss CEEG (Shanghai) Solar Science & Technology Co, Ltd v Lumos Solar LLC. In this case, a US Court of Appeals denied recognition and enforcement of a foreign arbitral award issued by the China International Economic and Trade Arbitration Commission (CIETAC).

The recognition and enforcement was denied on the ground that the Chinese language notice of arbitration was not proper notice under the New York Convention, despite the fact that that the objecting party received actual notice of the arbitration and participated at the hearing.

Introduction

In US court proceedings regarding the enforcement of a CIETAC arbitral award, the respondent, Lumos, succeeded in resisting the enforcement because the US courts found that:

  • in the circumstances of the case, an arbitration notice served in Chinese failed to meet the forum’s standards of due process, which requires that notice must be 'reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections’, and
  • the Chinese language notice deprived Lumos of the right to participate in appointing the arbitral tribunal, and therefore resulted in substantial prejudiceAs described below, the parties’ agreements referred to CIETAC arbitration, although the arbitration was administered by the Shanghai International Economic and Trade Arbitration Commission (SHIAC) (for ease of reference, we refer to CIETAC as the relevant institution).

On this basis, the US courts refused enforcement of the CIETAC award under article V(1)(b) of the New York Convention.

As described below, the parties’ agreements referred to CIETAC arbitration, although the arbitration was administered by the Shanghai International Economic and Trade Arbitration Commission (SHIAC) (for ease of reference, we refer to CIETAC as the relevant institution).

The Facts

CEEG (Shanghai) Solar Science & Technology Co, Ld (CEEG), a Chinese company, and Lumos LLC, a US company, entered into a co-branding agreement (the Agreement), under which Lumos agreed to buy solar products from CEEG over a period of three years. The Agreement contained a warranty provision, a stipulation that arbitration proceedings should be in English and a provision for CIETAC arbitration. Under the Agreement, details regarding individual orders were to be set forth in subsequent purchase contracts.

A dispute arose in connection with a subsequent sales contract (the Contract) between the parties. The Contract had a separate arbitration agreement from the Agreement. Unlike the Agreement, the arbitration agreement in the Contract did not stipulate that arbitration proceedings should be in English—instead, it merely provided for the arbitration to be conducted in accordance with the CIETAC arbitration rules, which designate Chinese as the default language of the arbitration.

After a dispute arose between the parties, CEEG sent a notice of arbitration to CIETAC. On 4 April 2013, CIETAC forwarded the arbitration notice and other documents (all in Chinese) to Lumos. Up to the point at which Lumos was served with a Chinese language notice of arbitration, the parties had communicated exclusively in English.

On 7 May 2013, Lumos’s CEO sent an email to CEEG, offering to settle the dispute. He also attached a copy of the Chinese documents Lumos had received from CIETAC and noted that Lumos could not understand the documents. CEEG’s counsel responded in an email, explaining, among other things, that the documents were from CIETAC, that CEEG had commenced arbitration in China and recommending that Lumos retain counsel. Lumos made no effort to contact CIETAC at this point and, 20 days later, on 27 May 2013, the arbitral tribunal was constituted without input from Lumos.

On 20 June 2013, a week prior to the scheduled arbitration, Lumos contacted the arbitral tribunal and requested an extension to prepare for its case. The tribunal granted the extension and rescheduled the hearing. Lumos participated in the arbitration and presented its substantive arguments. The arbitration was conducted in Chinese.

The arbitral tribunal found that it had jurisdiction under the arbitration clause in the Contract, but not the Agreement, and that the Agreement did not fall within the scope of the arbitration and had no effect on the Contract. The arbitral tribunal then found in favour of CEEG on the merits of its claim under the Contract. CEEG sought recognition and enforcement of the award at the US District Court for the District of Colorado, which granted Lumos’s motion to dismiss CEEG’s application for enforcement with prejudice. CEEG appealed to the US Court of Appeals for the tenth Circuit.

Reasoning and decision of the US Court of Appeals for the tenth Circuit

In rejecting CEEG’s appeal, the US Court of Appeals for the tenth Circuit focused on two issues.

First, the court considered whether the Chinese language notice of arbitration complied with the ‘proper notice’ requirement under the New York Convention, art V(1)(b). The court applied a US due process standard to this question; in particular, it asked whether the Chinese language notice of arbitration was ‘reasonably calculated to apprise’ Lumos of the proceedings.

The court concluded that, in the circumstances of this case, the Chinese language notice was not ‘reasonably calculated’ to apprise Lumos of the arbitral proceedings in China. It relied on the facts that all previous communications between the parties had been in English and the Contract stipulated that if its Chinese and English versions conflicted, the English version would prevail. Despite the fact that the arbitral tribunal had found the Agreement to be irrelevant to its jurisdiction and the dispute, the court found that the Agreement memorialised the parties’ understanding that all interactions and dispute resolution proceedings would be in English.

The court gave little weight to CEEG’s argument that the Contract did not specify that any arbitration relating to it was to be in English and that, pursuant to the CIETAC Rules, the notice of arbitration was sent to Lumos by CIETAC, not CEEG. It found that CEEG ‘could have moved for CIETAC to proceed in English’, and that ‘CEEG cannot avoid responsibility for insufficient notice by arguing that it assigned to a third party the duty to ensure that the notice was reasonably calculated to apprise Lumos of the proceedings’.

Second, the court considered whether Lumos demonstrated prejudice from the Chinese language notice. The court found that the Chinese language notice deprived Lumos of the right to participate in appointing the arbitral tribunal, and that constituted ‘substantial prejudice’.

CEEG argued that Lumos was not prejudiced because Lumos received actual notice of the pending arbitration on 7 May 2013 when its counsel told Lumos’s CEO that CEEG had commenced arbitration and the Chinese documents were from CIETAC. CEEG also noted that CIETAC did not formally appoint the tribunal until 20 days later. During that period, Lumos failed to contact CIETAC or to request that the appointment deadline be extended. CEEG argued that Lumos’s failure to appear in the proceedings until 20 June 2013 evidenced that it was Lumos’s unreasonable inattentiveness and not the alleged insufficient notice that had caused Lumos not to participate in selecting the tribunal.

The court rejected CEEG’s arguments:

  • on the procedural ground that CEEG did not argue that Lumos failed to diligently pursue its rights until its reply brief, hence that argument was waived
  • even if the arguments were not waived, it deferred to the District Court’s factual finding that Lumos ‘diligently’ sought Chinese counsel to represent it and this took a number of weeks to do

Having rejected CEEG’s arguments, the court agreed with the District Court that Lumos had met its heavy burden of demonstrating that the Chinese language notice had caused it ‘substantial prejudice’ because it prevented Lumos from participating in appointing the arbitral tribunal. The court did so with little analysis, but it emphasised that:

  • hindering the right to participate in the panel-selection process is not a minor procedural misstep, and
  • the arbitral tribunal determines the parties’ rights with virtually no possibility of appeal or review

Analysis

Given that the use of ‘foreign’ languages (ie, languages that are not the native tongue of one of the parties) is almost inevitable in the context of international arbitration, arbitration-friendly, pro-enforcement and pro-recognition courts typically reject arguments based on claims of prejudice due to the use of foreign languages in recognition proceedings under the New York Convention. (See, Gary Born, International Commercial Arbitration, Ch26.05 [C]), 2d ed, 2014)

Moreover, the notice required by the New York Convention, art V(1)(b)is ‘proper’ notice, which is undefined by the Convention’s express terms. It is clear, however, that ‘proper notice’ does not mean the same form of notice as that required in national court proceedings, but instead notice that is appropriate in the context of the parties’ contractual dispute resolution mechanism, including any applicable institutional arbitration rules. (See, Gary Born, International Commercial Arbitration, Ch26.05 [C], 2d ed, 2014).

In this case, however, the court applied the test for notice used in US litigation. By applying the "reasonably calculated" test, the court focused only on CEEG's conduct. Thus, the court explained that, because its analysis was only whether CEEG's notice was "reasonably calculated" to apprise Lumos of the arbitration, it did not consider whether Lumos should have known that the documents constituted notice. .After accepting the District Court’s finding that there was an understanding that the parties’ dealings would be in English, the court found that a Chinese language notice violated that test. It did so despite the fact that the notice complied with the requirements of the institutional arbitration rules that the parties had agreed to use, and did not violate any express requirements in the relevant contract. It also found that in the circumstances the onus was entirely on the (Chinese) party commencing the arbitration, and not on the (US) party that had received notice in Chinese.

Other than accepting that District Court’s finding that Lumos was ‘diligent’ in looking for Chinese counsel, and that it was ‘surprisingly’ difficult to do so, the Court of Appeal made no comment as to why Lumos could not have taken steps to have the notice translated before engaging Chinese counsel or otherwise could not have contacted the arbitral institution during the month after CEEG’s counsel told Lumos’s CEO that the documents were from CIETAC and that CEEG had commenced arbitration.

While to some degree the court of appeal’s holding is limited by its acceptance of the District Court’s finding that the parties had an understanding that they would proceed in English, the decision is notable for the leeway the US courts gave to the US party for failing to take any steps at all after it received the notice of arbitration from CIETAC and again after it was expressly told that the documents were a CIETAC notice of arbitration (other than to take a number of weeks to retain Chinese counsel and finally to appear in the case a month later). Moreover, the US courts seemed to assume that Lumos could not communicate with CIETAC unless and until it retained Chinese counsel.

The US courts also effectively assumed that CEEG was not entitled to take the position that any arbitration under the Contract could proceed in Chinese (despite the lack of a provision specifying that English would apply). CEEG’s counsel in fact told Lumos that CEEG’s view was that Chinese was the appropriate language given the silence in the Contract. If Lumos disagreed, the parties could have presented their differing views to CIETAC and, pursuant to CIETAC Rules, r 81(1), CIETAC could have decided what language or languages would apply in this case. There is no indication in the court of appeal’s decision that Lumos objected to the arbitration itself taking place in Chinese or whether CIETAC or the tribunal addressed such an objection. In the end, the arbitration proceeded in Chinese and Lumos participated. We are therefore left with a US court concluding that a Chinese language notice was improper for an arbitration that proceeded, otherwise properly according to the agreed rules, in Chinese.

Typically, when courts address claims of improper notice under the New York Convention, the prejudice alleged is that the lack of proper notice prevented the party from participating at all in the proceedings or from having sufficient time to present its case.

Here, there was no suggestion that the Chinese language notice deprived Lumos of a fair opportunity to present its case. Instead, the court concluded that the improper notice deprived Lumos of its opportunity to participate in the appointment of the arbitral tribunal. Interestingly, while the court noted that it is a defense to enforcement of a foreign arbitral award under the New York Convention, art V(1)(d) that the composition of the arbitral tribunal is not in accordance with the parties’ agreement, it did not conclude that this ground applied here. Rather, the court only addressed the improper notice claim under the New York Convention, art V(1)(b).

It is not at all clear that Lumos could demonstrate that the tribunal was not appointed in accordance with the parties’ agreement in order to invoke the New York Convention, art V(1)(d). When Lumos did not make an appearance at the outset of the arbitration or otherwise ask for CIETAC to delay the appointment process, CIETAC appointed an arbitrator for Lumos in accordance with the CIETAC rules (and therefore arguably in accordance with the parties’ agreement). As a result of conflating the issue of proper notice and the issue of participation in the appointment process the court:

  • concluded that there was improper notice without addressing whether the Chinese language notice prevented Lumos from having a fair opportunity to present its case, and
  • found that Lumos was prejudiced because it did not participate in the appointment of the tribunal, but the court did so without concluding the tribunal was improperly constituted

Whether a party who did not participate in the appointment of the tribunal but otherwise participated in an arbitration, and does not allege that it was prevented from presenting its case, is sufficiently prejudiced to justify not enforcing a foreign arbitral award against it is an interesting and potentially difficult question. However, by conflating the issues of notice and appointment, and providing only very brief analysis in support of its conclusions, the court’s decision does not shed much light on that question or address whether participating in the full hearing should be considered in determining whether notice was proper under the New York Convention, art V(1)(b).

What is the practical significance of the judgment?

Two practical considerations to take away from the case are:

  • that a party that otherwise fully participated in an arbitration may still be able to argue that an award against it should not be enforced if it can show that it did not receive notice in time to participate in the appointment of the tribunal, and
  • that a court could put the onus on the party commencing an arbitration to make sure that an arbitral institution serves the notice of arbitration in the language that has been used in the course of dealings between the parties, even if that language is not specified in the arbitration agreement

Even if the court’s conclusion here may be fact-specific and controversial, a party seeking to avoid enforceability concerns should be cautious about commencing an arbitration in a language other than that used between the parties (and may want to consider using multiple languages, if the parties have used multiple language in their contracts and other dealings), at least in the absence of an express provision in the arbitration agreement specifying the language of the arbitration.

The views expressed by our Legal Analysis contributors are not necessarily those of the proprietor.

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