2-2003.vp

Enforcement of Arbitral Awards againstRussian Companies outside Russia By Dr. Peter Stankewitsch, Attorney-at-Law, Baker & McKenzie (Frankfurt am Main, Germany)
vention contains rules on the validity of arbitrationclauses - a topic that shall not be examined here - Before companies from different countries enter and on the recognition and enforceability (as op- into an arbitration agreement in international busi- posed to the actual enforcement, see below sec- ness matters, they do not only have to carefully choose the appropriate arbitral tribunal and theapplicable set of rules for the arbitration proceed-ings. The practical value of an arbitration agree- 1. General Rules of the NY Convention
ment often only turns out when it comes to en-forcement. Each party should therefore also con- The system of recognition and enforcement of ar- sider the chances to enforce an arbitral award bitral awards under the NY Convention is laid against the other party and the risks to be itself ex- down in articles III - V. According to article III, “Each Contracting State shall recognize arbi- However, in order to do so, it is not sufficient to tral awards as binding and enforce them in ac- evaluate the risks and chances to seek enforce- cordance with the rules of procedure laid down ment in the respective country where a company is domiciled or registered. Each party has to be Article IV then determines the formal require- aware that an arbitral award may just as well be ments that have to be fulfilled by an application for enforced anywhere in the world, provided that the enforcement of foreign arbitral awards. Those re- the debtor has some assets there, including incor- quirements – the submission of the arbitral award poreal chattels such as a foreign bank account and of the arbitration agreement in the original or or accounts receivable from foreign debtors. How- in certified copies as well as a certified translation ever, information about enforcement of arbitral of those documents into the official language of awards in foreign countries is very often not easily the country where enforcement is sought – usu- ally do not constitute an obstacle for the enforce-ment of arbitral awards. Of higher practical impor- The following article therefore serves the purpose tance are therefore the grounds for refusal of recog- to outline the general rules and conditions of nition and enforcement of an arbitral award, which which a Russian company, against which an arbi- are exclusively enumerated in article V of the NY tral award was rendered, should be aware if it Convention. Those grounds deal, however, with ex- faces the risk that the judgment creditor might try ceptional circumstances, such as a violation of due to seek enforcement of the award abroad, i.e. out- process during the arbitration proceedings (cf. ar- ticle V (1)(b) covering the situations that a partywas not given proper notice or did not have a chan- ce to present its arguments to the tribunal), a lackof binding force of the arbitration agreement or of the arbitral award (cf. article V (1)(a) and arti- cle V (1)(e) of the NY Convention) or a violationof public policy (arti- The major legal source of international law regar- ding the enforcement of arbitral awards is the New 1 See, for a detailed discussion of the grounds for York Convention on the Recognition and Enforce- refusal of recognition and enforcement of arbitralawards under article V of the NY Convention, van ment of Foreign Arbitral Awards of 10 June 1958 den Berg, The New York Arbitration Convention of (in the following: “NY Convention”). The NY Con- RUSSIAN/CIS ENERGY & MINING LAW JOURNAL, 2'2003
and enforcement of the NY Convention can be ber state. If, e.g., a judgment creditor knows that summarized in the rule that foreign arbitral awards his debtor has a bank account in Liechtenstein at are generally recognized and enforceable in a mem- the Liechtenstein branch of a French bank, he is ber state of the NY Convention, unless excep- well advised to apply for a garnishment order with tional circumstances occur. In order to evaluate the competent French court. The French court whether a creditor can seek enforcement of an ar- has the authority to issue a garnishment order by bitral award outside Russia, a Russian company, which all claims of the judgment debtor against against which that award was rendered, should the French bank – the third party debtor – are therefore first of all find out whether the creditor seized. Provided that the Liechtenstein branch is could rely on the NY Convention. This depends on not a legal entity of its own, but forms part of RUSENERGYLAW theapplicabilityoftherulesoftheNYConvention theFrenchbank,suchagarnishmentordercan also attach the debtor’s Liechtenstein bank ac-count, which can be qualified as a conditionalclaim of the debtor against the French bank, pay- 2. Geographical Scope of the NY Convention
able at the bank’s Liechtenstein branch3.
As of 26 June 2003, the NY Convention has been Finally, the applicability of the NY Convention ratified and entered into force in 133 countries.
does, as a rule, not depend on the place where A constantly updated list of all member states, the foreign arbitral award was rendered. However, including the reservations made by some coun- a considerable number of member states4 made tries, is available in English on the website of use of the first reservation under article I (3) of UNCITRAL, although not in an authoritative form the NY Convention and declared that they will not (www.uncitral.org/en-index.htm). The list of mem- apply the Convention to awards made in the terri- ber states covers all major economic centers of tory of non-member states. Other countries5, such the world and is constantly increasing; countries as Belarus, the Russian Federation and Ukraine, that have not (yet) ratified the NY Convention can apply the Convention to awards of non-member mostly be found in Africa and on the Pacific states on the basis of reciprocity only, i.e. only to islands2. This basically worldwide application of the extent to which the non-member state recog- the NY Convention and of its general rules on rec- nizes and enforces arbitral awards made in those ognition and enforcement as outlined above un- der I.1. is certainly one of the major advantages ofarbitration as compared to litigation before state Due to the constantly decreasing number of non- courts. From the perspective of a debtor against member states, those reservations have, of course, whom an arbitral award was rendered, this also lost most of their practical importance. What is means that the creditor can seek enforcement of more, even if a member state does not apply the award almost everywhere in the world.
the NY Convention to arbitral awards of non-mem-ber states, the member state is free to grant recog- And even if the debtor has some assets in a non- nition and enforcement to such arbitral awards member state (like, e.g., a bank account in Liech- on the basis of its local laws. The NY Convention tenstein), he cannot necessarily be sure that tho- does not exclude the application of local laws se assets are safe from enforcement of the arbitral if those laws are more favorable to enforcement award. First, an arbitral award might also be enfor- of a foreign arbitral award (article VII (1) of the NY ceable on the basis of the local laws of the non- 2 The most notable non-member states might be Afghanistan, Andorra, Bahamas, Iraq, Liechten- stein, Pakistan, Tajikistan, Taiwan and Turkme- 3. Subject Matter of the NY Convention
While the geographical scope of the NY Conven- See the judgment of the French Cour de Cassa- tion (chambre commerciale) of 30 May 1985, pub- tion is almost worldwide and does therefore not lished in Revue critique 1986, page 329 et seq.
provide for any serious limits to the enforcement 4 According to the list of states published on the web- of arbitral awards, the restrictions of the NY Con- site of UNCITRAL, 68 out of 133 member states vention as to its subject matter are of a far higher have filed that reservation, inter alia Argentina,China, France, the United Kingdom and USA (as of a) First, the NY Convention only applies to foreign
5 According to the list of states published on the web- (as opposed to domestic) arbitral awards.
site of UNCITRAL, those states are (as of 26 June If a creditor of a French arbitral award seeks en- 2003): Belarus, Bulgaria, Cuba, Lithuania, Roma-nia, the Russian Federation, Ukraine and Vietnam.
forcement against certain assets of the Russian P.STANKEWITSCH. ENFORCEMENT OF ARBITRAL AWARDS AGAINST RUSSIAN COMPANIES OUTSIDE RUSSIA
judgment debtor that are located in France, the enforceable title later in order to start enforce- the creditor can not rely on the NY Convention, ment immediately after he learns that the debtor but has to refer to local French laws. Of course, has acquired assets in the forum state8.
it can easily be imagined that the local laws of While provisions on jurisdiction in local laws, there- the country where an arbitral award was ren- fore, usually do not impair the possibilities to en- dered usually do not impose higher obstacles force an arbitral award abroad, another proce- to the enforcement of domestic awards than the dural issue not covered by the NY Convention NY Convention does with regard to foreign arbi- could result in serious practical difficulties for en- tral awards. The inapplicability of the NY Con- forcement, namely the requirement of a jury trial.
vention to domestic arbitral awards does, there- If a judgment creditor had to present the foreign fore, not mean that such awards would be less arbitral award to a local jury in order to obtain a jud- gment for enforcement, the creditor might easily b) Second, some member states6 made use of
face the situation that the jury does not only re- the second reservation under article I (3) of view whether the award fulfils the conditions for enforcement under the NY Convention, but looks will only apply the Convention to commercial into the merits of the case. However, at least in disputes. As a result, those states may refuse the United States, it has been ruled that the judg- enforcement of arbitral awards in matters like ment debtor has no right to jury trial in enforce- matrimonial and other domestic relations or in ment proceedings under the NY Convention, disputes on the exercise of sovereign state po- as such proceedings primarily deal with questions of law and not with questions of fact subject to exa-mination by jury9.
c) The most important restriction to the application
of the NY Convention, however, lies in the fact There is, however, another topic where the restric- that the NY Convention only deals with the con- tions of the NY Convention as to its subject matter ditions for enforceability of an arbitral award.
are of high practical relevance: Since the NY Con-vention As a result, the rules of procedure on how an arbit- 6 According to the list of states published on the web- ral award becomes an enforceable title in a mem- site of UNCITRAL, 43 out of 133 member states ber state are – except for the formalities of the ap- have filed that reservation, inter alia Argentina, China, India, Poland, Turkey and USA (as of 26 plication laid down in article IV (see above un- der 1.) – subject to the local laws of that member 7 See, e.g., the decision of the US District Court for state. The NY Convention does not specify that the Southern District of New York in an action for a court has to issue a so-called “judgment for en- confirmation of a London arbitral award rendered forcement” in order to render a foreign arbitral between a Liberian claimant and a Panamanian respondent with its principal place of business in award enforceable, nor does the NY Convention Greece. The court dismissed claimant’s petition for contain provisions on what court has jurisdiction confirmation of the London arbitral award for lack of to decide on the enforceability of a foreign award.
personal jurisdiction over respondent, since personal jurisdiction would have required “some basis…, The local laws of the country where enforcement whether arising from the respondent’s residence, is sought can thus set up additional requirements his conduct, his consent, the location of his prop- for jurisdiction of the local courts in such cases, erty or otherwise” (Transatlantic Bulk Shipping Ltd. v. Saudi Chartering, 622 F. Supp. 25 (S.D.N.Y.
e.g. a sufficient connection of the case to the fo- 1985)). This decision is further discussed by Kro- rum, with the result that the courts will completely nenburg, Vollstreckung ausländischer Schiedss- refuse to deal with enforcement of certain arbitral prüche in den USA (2001), page 152 et seq.
8 Even in the U.S., some State courts – like the New York State courts – assume jurisdiction on a far However, since enforcement of an arbitral award broader basis than the District Courts, see Kro-nenburg, op.cit., page 153 note 894. In other coun- is normally only pursued in a foreign country if tries, local law provides for a subsidiary jurisdiction the judgment debtor has some assets in that of a certain court to decide on the enforceability of country, a sufficient connection of the application a foreign award that has no closer connection toany other local court of the forum state, see, e.g., for enforcement against those assets can usually sec. 1062 subsection 2, last alternative, of the Ger- always be established on the basis of the location man Code of Civil Procedure (ZPO) and the anno- of those assets. What is more, it is not uncommon tations on sec. 1062 by Schlosser in Stein-Jonas,ZPO, 22nd edition, note 3.
that a court assumes jurisdiction to decide on the enforceability of a foreign arbitral award even See judgment of the US District Court of the Eastern District of Michigan, Southern Division, in Audi if the case does not have any current connection to NSU Auto Union A.G. v. Overseas Motors, Inc., III Y.B.
the forum, since the judgment creditor might need Com. Arb. 291, 292 (E.D. Mich. 1972).
RUSSIAN/CIS ENERGY & MINING LAW JOURNAL, 2'2003
Convention, because this does, at best, only mean 2. Rule of Territoriality
that the award is enforceable in country X. The cre- Second, it is a recognized principle of interna- ditor also has to investigate whether and under tional law that a state can only grant enforcement what conditions he can actually seize certain as- against assets that are located within its territorial sets located in country X, and this depends on reach (rule of territoriality)11. E.g., an English bailiff the local laws of the country where enforcement is is not entitled to seize assets located in France; sought. From the perspective of a Russian compa- any such attachment would be against interna- ny against which an arbitral award was rendered, tional law and would not be recognized as valid.
it is thus important to find out whether those local In order to start enforcement measures, the judg- laws provide for additional defenses that can be ment creditor therefore has to address the author- RUSENERGYLAW usedinordertopreventenforcementagainstcer- itiesofthestatewheretheassets,againstwhich tain assets located abroad, even though the award enforcement shall be carried out, are located.
is as such enforceable under the NY Convention.
3. Enforcement Follows Property Law
Third, enforcement can only be validly carried out Due to the fact that the enforcement proceedings against the assets of the judgment debtor12, and as such are ruled by local laws not harmonized by the issue whether certain assets belong to the judg- way of an international convention, a full evalua- ment debtor, is determined by the applicable proper- tion of the chances and risks to seek enforcement ty law. Local enforcement laws only follow the le- abroad can only be made with regard to the spe- gal allocations of property rights established by cific rules of certain local enforcement laws. How- ever, there are at least three common features The three common features of local enforcement that can be assumed to apply to local enforce- laws outlined above can considerably influence ment laws in general and that can thus give the success of enforcement proceedings abroad, the parties a first hint to possible complications depending on the enforcement measures that are that might arise in enforcement proceedings.
at issue. This shall be illustrated in the followinggeneral overview of enforcement measures againstRussian companies’ assets outside Russia.
1. Preclusion of Defenses as to the Merits of
the Case
First, proceedings for the enforcement of an arbi-tral award are supplementary proceedings based on the arbitration proceedings that have resulted 1. Attachment on Russian Companies’ Assets
in the award. The debtor, against whom an arbitral outside Russia
award was rendered, therefore already had thechance to raise defenses as to the merits of the a) Rule of Territoriality
case in the arbitration proceedings10. In order to As a result of the rule of territoriality outlined abo- avoid that the creditor has to litigate the dispute ve under II. 2., it would be against international again when it comes to enforcement, the debtor law – and thus not be recognized by other coun- usually is precluded by local laws to raise de- tries – if a country permitted the attachment of as- fenses as to the merits of the case in the enforce- sets located beyond its territorial sovereignty.
ment proceedings, unless the defense only came A Russian company having assets in France can into existence after the award had become final therefore be sure that those assets can only be (e.g. the defense that the debtor fulfilled his obli- validly attached, as a rule, by a French bailiff and pursuant to the French law on enforcement.
However, it is not always easy to determine the loca- 10 If the debtor was not given the possibility to defend the case in the arbitration pro- tion of assets. The location of real property in a cer- ceedings, the arbitral award would not be enforceable under the NY Convention,see article V (1)(b) of the NY Convention and above under I.1.
tain country is, of course, an obvious fact, and the lo- cation of chattels – tangible property – can at least See, e.g., Geimer, Internationales Zivilprozessrecht, 4th edition, 2001, note 3200; Gottwald, IPRax 1991, page 288; Rogerson, Cambridge L.J. 49 (1990), page 448.
be objectively determined for a certain point of time.
Yet it is far from clear how the location of shares Including the legal successor to the judgment debtor and - possibly - certain parties who are liable for the judgment debtor’s debts; see, for the latter, below under III.4.
shall be determined. Should shares in a company, P.STANKEWITSCH. ENFORCEMENT OF ARBITRAL AWARDS AGAINST RUSSIAN COMPANIES OUTSIDE RUSSIA
at least if they are represented by share certificates half of the company and do not acquire property to which are traded at a stock exchange, be qualified the goods, the goods can, as a rule, be validly atta- as tangible property that is located at the location ched by the judgment creditor as long as title has not of the certificate? Or are shares so closely connec- passed from the debtor to its customers. If the dis- ted to the company that they are always located at tribution system, on the contrary, is based on inde- the seat of that company? There is no generally pendent distributors, who acquire title to the goods accepted answer to that question, so the location that they later sell on account of the Russian com- of shares – and thus the determination of the cor- pany, the creditor cannot attach the goods as rect enforcement measures and the international soon as they become property of the distributor16.
reach of such measures – depends on the appli- Similarly, due to the principle that enforcement fol- lows property law, retention of title to goods, which This can even lead to a different result for different were sold by the Russian judgment debtor and sent types of shares: If, e.g., a Russian company holds abroad, can increase the chances of the creditor to shares in a German “Aktiengesellschaft” (“AG”) – obtain a valid attachment on those goods. If the tit- i.e. in a stock corporation –, the shares can be trans- le to the goods had already passed to the buyer as ferred, according to German corporate law, by tran- soon as he took possession of the goods, the jud- sfer of the share certificates, and German law on gment creditor would no longer be entitled to seek enforcement therefore considers those shares as enforcement against those goods. If, however, being located at the place where the certificates are due to a valid retention of title, the goods remain located. If the Russian company, however, holds the property of the judgment debtor, the creditor shares in a German “GmbH” – i.e. in a limited liability can still try to seek enforcement against the goods company –, under German law, those shares, which as long as the buyer has not paid the full purchase are not represented by certificates, can only be as- price and thus has not acquired property17.
signed to another party like intangible accounts re-ceivable, with the result that a judgment creditor has 2. Attachment on Russian Companies’ Securi-
to obtain a garnishment order from a German court in order to seize the shares13. As a result, the sharesin a German stock corporation cannot be attached by a German bailiff, due to the rule of territoriality, if 13 Cf., regarding the different legal rules on the at- the share certificates are located outside Germa- tachment of shares of a German stock corporation ny14, while the shares in a German limited liability and of a German limited liability company, the an- notations by Stöber, Forderungspfändung, 12th edi- company are always subject to the territorial reach 14 The enforcement against such shares would, in such a case, only be possible if the country where b) Enforcement Follows Property Law
the share certificates are located permits the at-tachment of shares in a foreign company by attach- Pursuant to the principle outlined above under II. 3., ment of shares located in its territory.
foreign assets can only be validly attached by way 15 See, for a possible exception under the doctrine of enforcement if those assets are attributed to of “piercing the corporate veil”, below under 4. An- the judgment debtor’s property on the basis of other exception would be the situation that the the applicable property law. As a result, an arbitral judgment debtor transferred property to its subsid- iary, thus impairing the chances of the judgment award can be executed against the shares in a sub- creditor to obtain enforceable property of the sidiary of the debtor, because those shares be- debtor. In such a case, the judgment creditor long to the debtor pursuant to the applicable corpo- might, according to the applicable local laws, be of one country, at the entitled to challenge that property transfer.
rate and property law. At the same time, the arbitral award can not, as a rule15, be executed against It has to be pointed out, however, that the distinc- tion between distribution via agents and distribu- property owned by that subsidiary, since the sub- tion via independent distributors might often not re- sidiary, provided that it forms a legal entity of its sult in relevant practical differences. In both cases, own, is not identical to the judgment debtor and the judgment creditor is free to garnish possible claims of the debtor against the agent/distributor.
therefore generally has to be treated like a third What is more, local enforcement laws might not al- party not involved in the arbitration proceedings.
low the bailiff to attach property of the debtor as long as it is in the possession of a third party or as In addition, the exposure of a Russian judgment long as the agent does not hand out the propertyvoluntarily to the bailiff.
debtor to foreign enforcement measures can depend on the distribution system of the Russian company.
A valid attachment of the goods would, of cour- se, presuppose that the applicable local enforce- If the Russian company sells its products abroad ment laws permit the attachment on the debtor’s via agents, who sell the company’s goods on be- property while it is in the possession of a buyer.
RUSSIAN/CIS ENERGY & MINING LAW JOURNAL, 2'2003
ing on the nature of the security and on the condi- ly applied is the attachment on accounts receiv- tions for transfer of title. If, e.g., title to the security able. The location of accounts receivable is, due passes by a simple transfer of the certificate, to their incorporeal nature, a question of law and it makes more sense to determine the location not of fact. Local enforcement laws can thus pro- of the security through the location of the certifi- vide all different kinds of solutions to locate ac- cate, than if a formal notice to the issuer is an es- counts receivable, e.g., at the creditor’s domicile, sential requirement for the transfer of the security.
at the debtor’s domicile, or even at the place The nature of the security and the conditions for where payment has to be carried out. There is no transfer of title, however, depend on the law appli- generally accepted rule in this regard.
cable to the security as such, and that law is very RUSENERGYLAW oftenchosenbytheparties.
What is more, the local rules on jurisdiction differbroadly with regard to the garnishment19 of ac- As a result, if, e.g., the judgment creditor wants to counts receivable in a transnational case. A local enforce the arbitral award against certain Euro- court may assume jurisdiction to issue a garnish- bonds held by a Russian debtor, the judgment ment order, by which accounts receivable are at- creditor has to find out whether the local enforce- tached, in any case with a sufficient connection to ment laws provide for different rules depending on the forum; the rule of territoriality does not provide the nature of the security and, in this case, what is for clear limitations. It is thus not unusual that the nature of the security pursuant to the chosen a creditor has the choice to apply for a garnish- law. If, according to the chosen law, the Euro- ment order with different courts, e.g. with the court bonds can be traded by a simple transfer of where the debtor is located or with the court where the certificate, the creditor can, e.g., try to get hold the debtor’s debtor – i.e. the garnishee, upon of the Eurobonds while they are in Germany, be- whom the garnishment order has to be served – cause German law on enforcement allows a sei- zure of such securities by a simple attachment ofthe certificate by a bailiff18.
There is, however, a limitation that can arise frompractical complications with transnational garnish- Another type of securities, which illustrates the prin- ment orders: If a court assumes jurisdiction to gar- ciple “enforcement follows property law” (see nish a claim of the debtor against a garnishee lo- above II. 3.), are the so-called ADRs (“American cated abroad, the garnishment order has to be Depositary Receipts”). Although ADRs, which are validly served upon the garnishee in the foreign issued by US banks (especially New York banks) country. Some countries, like e.g. Germany, con- as “depositary”, represent shares in a non-US com- sider the service of a garnishment order upon the garnishee as an Act of State, which can, as a rule, See, regarding the German rules on enforce- only assume validity if it is carried out within ment, the annotations by Stöber, op.cit., notes the territory of the state where the order was issued20. In order to avoid legal discussions The term “garnishment”, which is used here and in the following, describes the attachment of a cleim on the validity of a garnishment order that has to a judgment debtor has against its debtor (the so- be served upon a garnishee located abroad, called “garnishee”). In order to attach such a claim the creditor is, therefore, usually in a better posi- of the judgment debtor, the creditor usually has to obtain, according to local laws, a so-called “gar- tion if he directly applies for a garnishment order nishment order” from the competent court (or other with the court having jurisdiction over the gar- state authority). By that order, which has to be nishee in its country of domicile. In addition, if served upon the garnishee, the garnishee is noti- fied of the attachment by the judgment creditor. Af- the creditor chooses the court at the garnishee’s ter service of the garnishment order, the garnishee domicile for the request for a garnishment order, usually can no longer validly fulfil the garnished the creditor might, pursuant to the applicable local claim towards the judgment debtor, but has to dis-close the details of the garnished claim to the court enforcement laws, be entitled to directly seek en- and can only validly fulfil the garnished claim as 3. Attachment on Ac-
forcement against the garnishee’s assets, if Receivable
the garnishee does not bring forward proper de- 20 See, for Germany, Gottwald, IPRax 1991, page by Russian Compa-
289 and Stöber, op.cit., notes 38 et seq. As a re- sult, if the garnishment order has to be formally The garnishment of accounts receivable by court served abroad by way of judicial assistance of order issued in the country of the garnishee’s do- the local authorities, those authorities may denya request for judicial assistance because they con- micile can, however, result in a serious dilemma sider service of a foreign garnishment order as an for the garnishee: If the debtor is entitled to pursue interference with the sovereign power of their co- the garnished claims before the courts of another untry, cf. article 4 of the Hague Convention on CivilProcedure of 1954 and Gottwald op.cit., page 289.
country, the garnishee can not be sure whether P.STANKEWITSCH. ENFORCEMENT OF ARBITRAL AWARDS AGAINST RUSSIAN COMPANIES OUTSIDE RUSSIA
those courts will recognize the foreign garnish- cement of the award against the assets of the U.S.
ment order. Since there exists no international parent company/ subsidiary of the Russian deb- convention on the recognition of foreign garnish- tor, provided that the U.S. company can be con- ment orders, the courts of another country might sidered as “alter ego” of the Russian company un- well refuse to recognize the foreign garnishment der the doctrine of piercing the corporate veil.
order and might confirm the garnishee’s obligationtowards the debtor. As a result, the garnisheecould be forced to carry out his obligations twice, once towards the creditor pursuant to the garnish- Due to the almost worldwide application of the NY ment order and the second time towards the deb- Convention, foreign arbitral awards are generally tor who turned to a court not recognizing the gar- recognized and enforceable throughout the world, unless exceptional circumstances occur. How-ever, since the NY Convention only deals withthe enforceability of a foreign arbitral award, 4. Parent Company’s Liability for Subsidiaries’
the subsequent enforcement proceedings are subject to the local laws on enforcement. Despitethe diversity of those laws, enforcement laws Pursuant to the principle “enforcement follows in general have at least three common features: property law” (see above II. 3.), an arbitral award The judgment debtor is basically precluded with obtained against a subsidiary – i.e. against a legal defenses as to the merits of the case; a state can entity of its own – can, as a rule, not be enforced against the assets of the parent company, since 21 This dilemma was actually confirmed in a case the parent company was not a party to the arbitral decided by the German Supreme Court for Labor proceedings and could not defend its case22.
Disputes (BAG), published in IPRax 1997, pages335 et seq. The BAG refused to recognize a for- However, there are situations when, under local eign garnishment order served upon a foreign em- ployer of the debtor and confirmed the debtor’s sal- laws, a parent company can be held liable for its ary claims pursued before the German labor subsidiary’s debts, e.g. if the parent company un- courts, since the salary was earned and payable in duly interferes with the subsidiary’s business or if the two companies’ assets are commingled in 22 Due to the preclusion of defenses as to the mer- a way that they can no longer be attributed to one its of the case - see above II. 1. -, the possibilities to company or the other. In such a situation, some raise defenses in enforcement proceedings are so limited that a parent company, which was not a local laws allow a so-called “piercing of the corpo- that faces enforcement party to the arbitration, would basically at no point rate veil”, with the result that the parent company of time be granted a sufficient chance to defend its can no longer raise the defense that it is a sepa- case, if an arbitral award rendered against a sub-sidiary was enforceable against the parent com- rate legal entity not responsible for the debts of its 23 See, for a discussion of this concept and a com- It is doubtful, however, whether this concept can parison of the rules under English and Russian law, Popova, Khozyaystvo i Pravo 2002, pages 62 also be applied to enforcement proceedings.
A parent company’s liability for its subsidiaries’ 24 In Flip Side Productions, Inc. v. Jam Produc- debts allows the creditors of a subsidiary to sue tions, Ltd. (1990 U.S. Dist. LEXIS 15411 (N.D. Ill.
both the parent and the subsidiary; it does not Nov. 8, 1990)), the US District Court for the North- necessary imply that the creditor can enforce ern District of Illinois, Eastern Division, held that even an affiliate company of the judgment debtor a judgment, that was rendered against the subsid- can be subject to enforcement proceedings under iary only, against the parent company without the doctrine of piercing the corporate veil. Since having sued the parent company before. Yet at the affiliate company had treated the debtor’s as-sets as though they were its own, the District Court least in the United States, there is case law allow- considered the affiliate company as alter ego of the ing such a piercing of the corporate veil in enforce- debtor and therefore did not grant it the right to a ment proceedings24. That case law is, however, full new trial on the merits of the case. However, not yet settled, and the legal situation in the US the judgment of the District Court has not beenconfirmed by Illinois State Courts later, and since has to be analyzed separately for each of the 50 the legal issues at stake are subject to State law, Il- States. As a general remark, it can be concluded linois case law does not give clear guidance so far, that a Russian company with a parent company or cf. the judgment of the US District Court for theNorthern District of Illinois, Eastern Division, in a subsidiary in the United States should be aware Harris Custom Builders, Inc. v. Richard Hoffmeyer, of the risk that a creditor, who obtained an arbitral 2001 U.S. Dist. LEXIS 10032 (N.D. Ill. July 17, award in its favor, might be entitled to seek enfor- RUSSIAN/CIS ENERGY & MINING LAW JOURNAL, 2'2003

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