What this is: Let's navigate the complexities of international arbitration and explore key elements such as the enforceability of arbitration awards, interpretation of "adequate notice" and the role of a process agent in such scenarios.
What this means: You should never underestimate the need for diligent practices in contract drafting, especially regarding arbitration clauses and notification processes. It is also important to consider the crucial role a process agent can play in ensuring a smoother arbitration process, promoting legal certainty and maintaining compliance in cross-border financial transactions.
Imagine the following scenario: ABC Project Developer S.A., a South American company, signs a loan agreement with Great People’s Bank, an American financial institution, for a principal amount of US $10 million for a 5-year term. New York was the governing law of the contract designated by the parties. 2 years later, the company finds itself in financial difficulty and is unable to make the agreed-to principal and interest payments and ends up defaulting.
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In the normal course of events, the bank would sue the company in a New York court to recover the money owed. In our scenario, however, the contract included an arbitration clause, stipulating that the arbitration award will be final and binding and cannot be appealed to a court.
If the bank wants to commence arbitration proceedings, how can it make sure the company is properly notified, and that arbitration will result in an enforceable order?
Important Treaties Addressing Enforceability of Arbitration Awards
So far, 172 countries have ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the “New York Convention”), one of the most important treaties governing arbitration between citizens of the United States and foreign citizens, along with the Panama Convention of 1975, which has been ratified by 35 countries. This means that, in principle, an arbitration award can be enforced in any of those jurisdictions. While neither the New York Convention nor the Panama Convention describes what constitutes effective service on a foreign company, they both offer some guidelines which have been further developed by US courts.
The New York Convention stipulates that the respondent must be “given proper notice of the appointment of the arbitrator or of the arbitration proceedings.” Otherwise, courts may refuse to recognize and enforce an arbitration award. Similarly, the Panama Convention says that the respondent must be “duly notified of the appointment of the arbitrator or of the arbitration procedure to be followed.” Because the phrases “proper notice” and “duly notified” leave some room for interpretation, US courts have developed a “due process test” in an effort to set a more predictable standard.
What is “Adequate Notice”?
For example, in a case arising under the Panama Convention, Employers Insurance of Wausau v. Banco de Seguros del Estado, 199 F.3d 937, 942 (7th Cir. 1999), the Seventh Circuit explained that “adequate notice” should be understood as “notice 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.” In that case, one of the defendants claimed not to have been notified of the arbitration proceedings. The contract signed in that case, however, contained an “agent for service of process” clause. This led the court to conclude that there was an agency relationship from which actual notice could be inferred, and therefore the due process test had been met.
Avoid Notification Issues by Appointing a Process Agent
In our scenario from the beginning of this post, including an agent for service of process or “process agent” clause in the agreement (and notifying the appointed agent for service of process) would eliminate any questions as to whether ABC Project Developer was properly notified of the arbitration proceedings. In fact, even though the rigorous rules regarding court service do not apply to arbitration, including a service provision (specifically identifying for whom documents should be served) makes service of proceedings and other types of notices more straightforward, thus helping avoid ambiguity.
Of course, there are many other factors to consider when drafting arbitration clauses, but appointing a professional and responsive process agent could make all the difference if an issue ever needs to be arbitrated. Just like a good pair of suspenders, appointing a process agent is not always a must, but it can give you some added security and peace of mind in holding up a deal.
What are types of transactions that require a process agent?
A process agent is often appointed as part of cross-border financial transactions involving commercial banks, sovereign states, multilateral lending agencies, export credit agencies and corporate entities.
Appointment of a process agent may also be required in the following types of global financing transactions:
- Commercial real estate
- Credit financing
- Aviation purchase, leasing and/or financing
- Cross–border pre-export financing
- Derivatives (ISDA Master Agreements)
- Debt/Equity Capital Market offerings
- Rule 144A/Regulation S offerings
- Private placements
- Foreign issuer
- Commercial bank and syndicate lending deals
For more information, you can read our article What is a Process Agent and Why Do You Need One?
What are choice of forum and choice of law clauses?
Forum selection and governing law clauses are usually presented together and require a lot of consideration from the lawyers who are drafting the contract. Some of the main questions typically asked include:
- Does the forum chosen have a clear and well-developed body of law?
- Does the law of that particular jurisdiction respect party autonomy and freedom of contract?
- Are the courts in that jurisdiction accessible to foreign parties and capable of deciding on international business matters?
If we told you that New York checks all of those boxes (and more), would that influence your choice in your next international transaction?
Learn more in our article The Benefits of Choosing New York Law in Cross Border Financial Transactions.
Is a process agent required under a certification by a foreign bank?
Yes. When a US bank provides correspondent accounts to foreign banks, one of the requirements under the USA Patriot Act is for the foreign banks to complete a Certification Regarding Correspondent Accounts for Foreign Banks. This Certification requires the appointment of a process agent.
A “correspondent account” is an account established to receive deposits from or make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.