In a case of first impression, the United States Fifth Circuit Court of Appeals affirmed a district court’s refusal to confirm a foreign arbitral award due to lack of personal jurisdiction. In First Investment Corporation of the Marshall Islands v. Fujian Mawei Shipbuilding, Limited, No. 12-30377 (5th Cir. revised Jan. 17, 2013), First Investment Corporation of the Marshall Islands (“First Investment”) entered into a series of contracts to purchase new ships from Chinese state-owned Fujian Shipbuilding Industry Group Corporation (“FSIG”) and Fujian Mawei Shipbuilding Limited, a private company that is owned in large part by FSIG (collectively, the “Fujian Companies”). According to First investment, the Fujian Companies breached the parties’ shipbuilding agreement by refusing to honor an option contract. As a result of the alleged breach, First Investment invoked an arbitration clause in the parties’ contract and an arbitration panel was formed in London under the rules of the London Maritime Arbitration Association.
A three-member arbitral panel decided in favor of First Investment. One of the arbitrators, however, was unable to sign the award because he was detained by the Chinese government before a final draft was completed. His draft dissenting opinion was attached to a final arbitral award of $26 million. After the arbitral award was issued, First Investment attempted to confirm it in China under to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Chinese court reportedly refused to confirm the $26 million award pursuant to Article V of the New York Convention because the detained arbitrator never reviewed the final draft.
About one year later, First Investment sought to confirm the arbitral award against both the Fujian Companies and the People’s Republic of China in the United States District Court for the Eastern District of Louisiana. Although the court issued a default judgment in favor of First Investment, it was later vacated as a result of improper service. The Louisiana court then granted the Fujian Companies’ motion to dismiss the case for lack of personal jurisdiction. The court also dismissed First Investment’s petition against China for lack of subject matter jurisdiction. First Investment then appealed to the Fifth Circuit.
According to the appeals court:
…First Investment argues that the Fujian Entities, as foreign entities with no contacts in the United States, were not entitled to the protections of the Fifth Amendment’s Due Process Clause. First Investment further asserts that personal jurisdiction is not a valid defense under the New York Convention. Finally, First Investment argues that because the Fujian Entities were alter egos of the PRC, a foreign state over which personal jurisdiction was not required, the district court was wrong to dismiss the Fujian Entities.
As to the first argument, the Fifth Circuit stated there is no case law to support First Investment’s contention that foreign entities without property in the United States are not entitled to due process protections. Instead, the court held,
…[T]here is no basis to conclude that a party’s status as a foreign entity permits a court to ignore personal jurisdiction or exercise such jurisdiction without first establishing sufficient contacts between the defendant and the forum state.
Next, the appellate court addressed First Investment’s claim that lack of personal jurisdiction is not one of the grounds on which confirmation of an arbitral award may be denied under the New York Convention. The court stated,
Even though the New York Convention does not list personal jurisdiction as a ground for denying enforcement, the Due Process Clause requires that a court dismiss an action, on motion, over which it has no personal jurisdiction. See Pervasive Software, Inc., 688 F.3d at 220-21. Because the New York Convention, through its implementing legislation, is an exercise of presidential and congressional power, whereas personal jurisdiction is grounded in constitutional due process concerns, there can be no question that the Constitution takes precedence.
The Fifth Circuit continued,
Regardless of Congress’s intent in failing explicitly to include a personal jurisdiction requirement, a court is not thereby relieved of its responsibility to enforce those constitutional protections that guard a party from appearing in a forum with which it has no contacts.
Finally, the appeals court dismissed First Investment’s argument that the Fujian Companies are merely alter egos for the People’s Republic of China by stating the company failed to meet the accepted “standard for establishing an alter ego relationship.”
Because there was no basis to establish personal jurisdiction over the Fujian Companies or subject matter jurisdiction over the People’s Republic of China, the United States Fifth Circuit Court of Appeals affirmed the district court’s decision to dismiss the case.