Introduction
As a practicing arbitrator, I am notstrictly involved or concerned in the enforcement and execution ofmy awards. But I have an interest in what happened to the awards Ihave published, solely or jointly. One such award is a Londonarbitration award concerning a dispute under a medium-term“contract of affreightment” (“COA”) which was repudiated by thecharterers, Dalian Dong Zhan Group Co. Ltd. (“DZG”) as a result ofthe financial tsunami in late 2008. The shipowners, Samsun Logix, aSouth Korean company, commenced arbitration in London to claim forlosses and damages. The tribunal decided that the financial tsunamidid not amount to frustration of the contract under English law andthe charterers must pay pecuniary damages assessed in the amount ofUS6,243,771, plus interest and costs.
This arbitration award is now in thepublic domain as it was referred to in the important case ofSamsun Logix Corp. v, Bank of China, et al, 2011 NY Slip Op50861(U) [31 Misc 3d 1226(A)]，which was decided by the SupremeCourt of the State of New York County of New York on May 12, 2011.The reported case dealt with the enforcement and execution of thesaid award.
On the face, it is strange for aprevailing or successful party in arbitration to enforce andexecute an award in the United States where DZG does not have anyconnection nor any known assets. It would appear that any action ofenforcement and execution should be conducted in China under theNew York Convention 1958. It may not be as easy or speedy asin some of the pro-enforcement jurisdictions, but one still hearsof successful enforcement and execution of arbitral awards fromtime to time.
The action in New York by Samsun Logix wasagainst all the Mainland Chinese banks having branch offices in NewYork. In addition to the Bank of China, other co-Respondents are:Bank of Communications Co Ltd., China Construction BankCorporation, China Merchant Bank Co Ltd., Industrial and CommercialBank of China Limited, and Agricultural Bank of China Limited. Thepurpose of this action is to seek the New York Court’sauthorization to a worldwide discovery and unspecified foreignassets restraint and turnover. Clearly, it is an extremelyimportant case because if Samsun Logix was successful, it could bethe end in the importance or relevance of the New YorkConvention 1958. Successful parties in arbitration can allqueue up before the New York courts to apply for a worldwideturnover order, without having to be bothered with enforcement andexecution in less friendly or relatively less speedy jurisdictionslike Indonesia, Philippines, Thailand, or even Malaysia, Japan orSouth Korea (just limiting myself to Asian countries).
Third party debt order or turnoverorder
It may be useful to briefly explain what Iknow to be a turnover order. Under English law, it is the “thirdparty debt order” under Civil Procedure Rules Part 72, whichreplaced the previous Rules of Supreme Court Order49 providing for “garnishee proceedings”. Inspite of the change ofname, the nature of this remedy remains essentially thesame. Itis an order against assets including debts due or accruing due tothe defendant (or losing party in an arbitral award) by a thirdparty debtor such as a bank within the jurisdiction of the Englishcourts. By first obtaining an interim third party debt order(formerly garnishee order nisi), the judgment creditor whoprevailed in an arbitration causes an equitable charge to becreated over the debt due to the defendant on the third party. Itvery much freezes the money or assets in the hands of the bank orother third party debtor until the order is made absolute (orfinal) or is discharged. The judgment creditor can, on the returndate, apply for a final third party debt order (formerly garnisheeorder absolute). This method of execution of a successful arbitralaward remains to be one of the most common and essential way inpractice.
With London and New York being thepre-eminent financial and banking centres, most major banks fromforeign countries have opened up branches in these two centres.This gives rise to London and New York courts having the ability toexercise jurisdiction against foreign banks. Undoubtedly, if it hasto do with money or assets (such as, a bank account) held locallyeven by a foreign bank, the courts must have jurisdiction to makeany order, including a third party debt order, against the foreignbank or its branch office. But any attempt to order money or assetsheld in foreign jurisdiction is quite a different matter by reasonsof comity, jurisdiction and/or other serious repercussions whichwill be discussed later.
If the action is against the party who haslost in the arbitration and the court can find personaljurisdiction, ordering the party as the defendant to turnoverforeign assets to pay up and discharge the judgment debt is less ofa problem. But to order an innocent third party (e.g. the bank) toturnover foreign assets in a worldwide third party debt order isquite a different matter altogether.
Worlwide freezinginjunction
English courts making orders affectingforeign assets held by a foreign bank in London have happened fromtime to time since Babanaft International Co SA v. Bassatne(1990) Ch. 13 in the so-called “worldwide freezing injunction”(formerly Mareva injunction). Such injunction invariablyincorporated a “Babanaft proviso” making it clear that no partiesother than the defendant shall be affected and it is always subjectto the jurisdiction of the foreign court where assets were held tomake any different order or direction. Therefore, a worldwidefreezing injunction is very different with a worldwide third partydebt order or turnover order.
English decisions in worldwide third partydebt orders
In two maritime arbitration cases thatwent all the way to the former House of Lords, it was decided thatEnglish courts do not have the jurisdiction or power to make aworldwide third party debt order. The cases are: Societa EramShipping Company Ltd. v. Hong Kong and Shanghai Banking CorporationLtd. (2003) UKHL 30 and Kuwait Oil Tanker Company SAK v. UBSAG (2003) UKHL 31. The reasons are essentially as follows : (1)Third-party debt orders deal with assets or in rem, foreign assets aretherefore outside the jurisdiction of English courts; (2) Internationalcomity; (3) The danger of “double jeopardy” or “double liability”in that the foreign court where the assets were held may order thebank to pay again to the judgment debtor (or the party who lost thearbitration).
With regard to the second case against UBSAG, there were the further concerns of banking confidentialityunder Swiss law and The Lugano Convention in Article 16(5)provided for: “Inproceedings concerned with the enforcement of judgments, the courtsof the contracting State in which the judgment has been or is to beenforced (are to have exclusive jurisdiction)”.
There were also other unreported cases atthe lower level of English courts which the writer was aware, suchas, against Bank of China’s branch in London, which met the samefate.
So as far as England or London isconcerned, the danger of worldwide third party debt orders whichmay topple the New York Convention appears to be atbay.
US decisions in worldwide turnoverorders
The Koehler decision
It started with the New York Court ofAppeal’s 4-3 decision in Koehler v. Bank of Bermuda Ltd., 12NY 3d 533 (2009). It was a question from the lower court concerningthe Civil Practice Law and Rules (CPLR) in Article 5225(b)which says: “Property not in the possession ofjudgment debtor.Upon a special proceedingcommenced by the judgment creditor, against a person in possessionor custody of money or other personal property in which thejudgment debtor has an interest, … where it is shown that thejudgment debtor has an interest … where it is shown that thejudgment debtor is entitled to the possession of such property …the court shall require such person to pay the money, or so much ofit as is sufficient to satisfy the judgment, to judgment creditor …The court may permit the judgment debtor to intervene in theproceeding. The court may permit any adverse claimant to intervenein the proceeding and may determine his rights in accordance withsection 5239.”
The question posed by the lower court was:“whether a court sitting inNew York may order a bank over which it has personal jurisdictionto deliver stock certificates owned by a judgment debtor … to ajudgment creditor, pursuant to CPLR Article 52, when those stockcertificates are located outside New York”.
It was concluded, by a controversial (withstrong dissent) and majority decision in the Court of Appeal, that:“a court sitting in New Yorkthat has personal jurisdiction over a garnishee bank can order thebank to produce stock certificates located outside New York,pursuant to CPLR 5225(b).”
This decision is clear to havewide-ranging implications when it comes to enforcement andexecution of arbitral awards. But there was no direct reported caseconcerning the enforcement and execution of arbitral awards untilthe decision in Samsun Logix Corp. v, Bank of China, et al,on May 12, 2011. In the interim period, there must be a lot ofactivities trying to take advantage of the situation. For instance,in a well-known shipping newspaper called Tradewinds, onDecember 24, 2009, there was a brief report saying: “A Danish shipowner has become thefirst to use ‘Koehler lawsuits’ to force a charterer to pay up onarbitration awards. Shipowners including Denmark’s Eitzen Bulk arequietly trying out a brand-new legal technique in US courts afterthe breakdown of the Rule B system of attaching electronic fundstransfers (EFTs). New York lawyers are touting ‘Koehler lawsuits”as a powerful way to use foreign banks to force charterers or othershipping debtors to pay up on arbitration awards.” This reportshould have led to the decision in Eitzen Bulk v. Bank ofIndia, 2011 WL 4639823, No. 09-cv-10118 (S.D.N.Y. Oct 5,2011)(AKH) which will be touched on later in thisarticle.
Challenging the Koehlerdecision
The US banking community, via the“Institute of International Bankers” (IIB) and the “Clearing HouseAssociation LLC” (CHA), was very concerned with the Koehlerdecision. If it is to be expanded, banks in New York willeffectively be used as the collecting agents and information sourceabout the debtors by judgment creditors in arbitral awards orforeign judgments. The IIB has established a working group ofinterested banks to address the Keohler decision. The CHA haslobbied to try to have the Koehler decision overturned or limited.Both IIB and WHA have served amici curiae or amicus briefs tothe court in Samsun Logix Corp. v, Bank of China, etal.
Incidentally, the IIB is the only nationalassociation devoted exclusively to representing and protecting theinterests of the international banking in the US. The US operationsof IIB members have a total US assets of approximately US$4.8trillion, employed 250,000 people in the US and spent more thanUS$60 billion annually on their US operations. The CHA providespayment, clearing and settlement services to its member banks(comprises of Banco Santander, SA; Bank of America, NA; The Bank ofNew York Mellon; Capital One, N.A.; Citibank, NA; Deutsche BankTrust Company Americas; HSBC Bank USA, NA; JP Morgan Chase Bank,NA; The Royal Bank of Scotland, NV; UBS AG; U.S. Bank, NA and WellsFargo Bank, NA) and other financial institutions, clearing almostUS$2 trillion daily and representing nearly half of the automatedclearing-house, funds-transfer, and check-image payments in theUS.
There was also the proposal to amend theCPLR, limiting turnover orders to assets over which the New Yorkcourt has jurisdiction, namely, assets in New York.
In a way, it represents a long-termdilemma for New York. If New York wants to remain the leading worldfinancial and banking centre, it has to limit its ambition to be aworld legal centre, at least in the actions concerning seizingpre-judgment security, post-judgment enforcement/ execution and/orinformation gathering through the banks in New York.
There is the further worry ofoverburdening the banks in New York in worldwide informationgathering (which is a fishing expedition in search of assets heldby the debtors) and worldwide turnover orders. A relatively recentexperience in the so-called “Rule B attachment of Electric FundTransfers” must be telling. Back in 2002, the United States Courtof Appeals sitting in New York held in Winter Storm Shipping Ltdv. TPI, 310 F.3d 263 (2d Cir. 2002) that an EFT is attachableproperty and, in that particular case, the EFT in the hands of theAmerican intermediary bank, which has frozen priorto its electronic transfer to the beneficiary’s bank, constituted“funds held by theintermediary bank for the account of the originator”. Theoriginator of the electronic transfer was the defendant in theattachment case, so the Court of Appeal upheld theattachment.
This new method of obtainingpre-arbitration or pre-award security for maritime claims hasattracted numerous clients to New York law firms in the years tocome. There were other shipping law firms in the US who did nothave offices in New York opened up just to capitalize this newbooming business. The writer recalls in his capacity as a maritimearbitrator in London and Hong Kong that Rule B attachments have ledto many dormant arbitration cases reactivated with the respondentspressing ahead much more diligently than the claimants. But theill-fated Rule B attachments eventually overburdened the New Yorkcourts and the banks. It ended on October 16, 2009 in the U.S.Court of Appeals for the Second Circuit, reversing Winter Stormcase in its decision in Shipping Corp. of India v. JaldhiOverseas PTE Ltd., 2009 U.S. App. LEXIS 22747 at *38 (2dCir. Oct. 16, 2009). It was held “EFTs being processed by intermediarybanks are not subject to attachment under Rule B.”
At least the Rule B attachment was limitedto maritime claims only. The worldwide turnover orders, if upheldor sustained, would apply to a much wider scope. The ultimateadverse effect in overburdening the New York courts and banks willbe far more serious.
The decision in JW Oilfield Equipment, LLCv. Commerzbank AG
This case is the first known orderdirecting the turnover of foreign-based bank account held by ajudgment debtor. In JW Oilfield Equipment, LLC v. CommerzbankAG, 2011 WL 507266 (S.D.N.Y. Jan 14, 2011), the judgmentcreditor JW Oilfield obtained a court judgment against JJS OilfieldSupply in the Western District of Oklahoma. JW Oilfield thenregistered the judgment in the Southern District of New York. Ithad knowledge that JJS Oilfield Supply maintained an account atCommerzbank AG in Germany and brought a CPLR 5225(b) turnoveraction against Commerzbank AG. Commerzbank AG objected to theturnover on various familiar grounds such as: JJS Oilfield Supply’sdue process rights were violated, forum non conveniens,international comity, double jeopardy or liability and the“separate entity rule” (which provides that each branch of a bank be treated as aseparate entity for attachment purposes). The objections weresummarily rejected by Judge Castel, who granted the turnoverrelief.
The decision in Samsun Logix Corp. v, Bankof China, et al,
It should however be noted that aconflicting decision was reached in Samsun Logix Corp. v, Bankof China, et al, 2011 NY Slip Op 50861(U) [31 Misc 3d 1226(A)]and it is the first case concerning a foreign arbitral award(London award). In a relatively short judgment, the Supreme Courtof New York County held in favor of the respondents, Bank of China,et al.
It seems some of the arguments raised byBank of China had particularly influenced the Supreme Court judge,Justice Soloman. One such argument is the “separate entity rule”. JusticeSoloman differed with Judge Castel’s reasoning inJW Oilfield Equipment, LLC v. CommerzbankAG. She rejected the assertion that the rulehad been abrogated by the Koehler decision.
The other argument by the respondent isthe “double jeopardy or liability”. Justice Soloman accepted theexpert evidence in the form of an Affidavit by Mr. Zhipan Wu (Professor of law,Executive Vice Chancellor of Peking University, and Dean Emeritusof Peking University Law School) testifying that the Chinese lawprohibits Chinese commercial banks from complying with an orderissued by a court in a jurisdiction outside of China to discloseinformation about customer accounts in China, to freeze suchaccounts, or to transfer funds from such account to a judgmentcreditor outside of China. A violation could expose the bank\'sofficers and employees to civil and criminal liability.
The future?
It may be that the US Federal Courts underthe US Court System (of which maritime and international tradecases can usually go to) are more receptive to the worldwideturnover orders than the Supreme Court under the New York StateCourt System. There have been two subsequent Federal Courtsdecisions since Samsun Logix in Eitzen Bulk v. Bank ofIndia, 2011 WL 4639823, No. 09-cv-10118 (S.D.N.Y. Oct 5,2011)(AKH) and Gucci America, Inc. v, Weixing Li,10-cv-04974 (S.D.N.Y. Aug 23, 2011)(RJS). It was held that foreignbanks (Bank of India and Bank of China, respectively) must turnoverinformation on foreign bank accounts over strong objections bythose banks.
In Eitzen Bulk v. Bank of India,the judgment creditor, Eitzen Bulk, had prevailed or succeeded in aLondon arbitration and was awarded US$36,606,769.74, plus costs andinterest. Bank of India refused to turnover foreign account recordsof judgment debtor pursuant to information subpoenas issued byjudgment creditor Eitzen Bulk. This can be done if the judgmentcreditor certifies that it \"has a reasonable belief that theparty receiving the subpoena has in [its] possession informationabout the debtor that will aid in collection of the judgment”:N.Y.
C.P.L.R. 5224(a)(3)(I). Bank of Indiahad limited its responses to information available from within itsNew York Branch but not other branches, particularly in Mumbai,claiming to have no direct access to record. Specifically, Bank ofIndia did not respond to requests of “[a]copy of all document[s]referencing, describing, initiating, or instructing anytransaction, transfer of funds, or wire transfer, includingElectronic Funds Transfers, which name Judgment Debtor ASHAPURAMINECHEM LTD. or any of its vessels including \"ASHA PRESTIGE,\"\"ASHA ASHIK,\" \"ASHA HIMANI,\" \"ASHA MANAN,\" from January 1, 2008, topresent[;]” and “[a]copy of all communications, of any type, to, from, about, orrelated to Judgment Debtor ASHAPURA MINECHEM LTD., includingletters, e-mails, faxes, or any other form of communication made to,received from, about, referencing or concerning ASHAPURA MINECHEMLTD. and/or its property, debts, credits, investments,transactions, vessels or any other relationship or activities fromJanuary 1, 2008 to the present.” It was ordered byJudge Hellerstein to comply, holding that the “separate entityrule” does not and has never been applicable to the issue ofwhether a bank is obliged to comply with post-judgment informationsubpoenas.
In Gucci America, Inc. v, WeixingLi which is not in the judgment enforcement context but themechanics are the same, Judge Sullivan ordered that Bank of Chinamust turnover account information for defendants’ China-basedaccounts. It is an action in which Gucci America
was suing a number of suspected Chinesemanufacturers in violation of copyright and trademark infringement.In the US, there is a special statutory scheme that governsintellectual property violations. That scheme allows courts toissue equity-based freezing injunctions over the suspected profitsof the violating party/parties. Judge Sullivan held that thisinjunction has world-wide effect and ordered Bank of China tofreeze the defendants’ China-based accounts.
The writer understands that the SamsunLogix decision is still pending for appeal and thedeadline is due in March 2012. If the decision is indeed to beappealed, the final words of the New York State Court of Appealwill be decisive and dispositive of whether or not foreign bankdeposits are subject to a turnover order. The writer is anxious tosee the development in this absolutely important area affecting thefuture of the New York Convention 1958.
Philip Yang,
December, 2011.
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