China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corporation

This matter comes on before this court on an appeal by the Chi Mei Corporation ("Chi Mei") from the district court's order entered June 11, 2002, granting the motion of China Minmetals Import & Export Co. ("Minmetals") to confirm and enforce a foreign arbitration award and from the judgment entered on August 26, 2002, in favor of Minmetals and against Chi Mei in the amount of $4,040,850.41. For the reasons stated herein, we will vacate the district court's order and judgment and will remand the case for further proceedings.

Chi Mei is a New Jersey corporation and Minmetals is a corporation formed and existing under the laws of the People's Republic of China ("PRC").1 Production Goods and Materials Trading Corp. of Shantou S.E.Z. ("Shantou"), which also is implicated in this action, likewise is a corporation formed and existing under the laws of the PRC.

This dispute arises out of a transaction involving Chi Mei, Minmetals, and Shantou. The parties dispute almost every detail of the transaction; for example, Chi Mei refers to it as a "currency conversion transaction"2 while Minmetals calls it a contract for purchase by Minmetals of electrolytic nickel cathode. Moreover, we do not find the parties' descriptions of the transactions to be completely clear, a problem that fortunately does not impede our ability to decide this case. Chi Mei argues that it never intended nor agreed to sell anything to Minmetals and alleges that the contracts on which Minmetals relies were forged. On the other hand, Minmetals argues that Chi Mei failed to deliver the goods it promised to sell after receiving payment by drawing on a line of credit of several million dollars.

According to Chi Mei, on or about June 12, 1997, Shantou sought out Chi Mei to discount a certain sum of U.S. dollars. J.A. at 119.3 Chi Mei orally agreed to provide discounting services for a .7% commission of the amount of U.S. dollars before discount. Minmetals was to obtain the funds by way of a letter of credit obtained from the Bank of China, as the PRC apparently authorized Minmetals to engage in currency conversion transactions. Chi Mei asserts, however, that Shantou did not disclose its relationship with Minmetals to it and that it was unaware of Minmetals' role in the transaction until after the delivery of the proceeds of the letter of credit to Shantou. Chi Mei subsequently was to transfer the funds to accounts Shantou designated, and Chi Mei did so. By contrast, Minmetals asserts that the transaction involved an agreement to purchase electrolytic nickel cathode alloy, it issued letters of credit worth several million dollars to Chi Mei, and Chi Mei knowingly submitted to a New York bank numerous false documents evidencing the sale, including an invoice, weight packing list, quality certificate, and bill of lading, in order to collect funds under the letters of credit. Minmetals contends that Chi Mei did not deliver the goods described in the contracts.

Two contracts submitted to a bank in the PRC that purport to be contracts for the sale of nickel by Chi Mei to Minmetals for a sum equal to the amount of the letters of credit (the "Sale of Goods contracts") are central to this dispute. Chi Mei alleges that the two contracts were entirely fraudulent, containing a forged signature of a nonexistent Chi Mei employee as well as a forged corporate stamp. Chi Mei further alleges that it was unaware of the existence of these contracts until it appeared at the arbitration that is the subject of this dispute. The contracts provide for binding arbitration of any disputes in connection with the contracts before the China International Economic and Trade Arbitration Commission ("CIETAC"). App. at 33.

According to Chi Mei, it performed its duties under the oral agreement governing the currency discounting transaction and delivered the funds to Shantou after collecting its .7% commission.4 Shantou then allegedly misappropriated the funds, refusing to remit any of them to Minmetals.5

On or about November 14, 1997, Minmetals initiated an arbitration proceeding before CIETAC against Chi Mei pursuant to the arbitration clauses contained in the Sale of Goods contracts.6 Chi Mei repeatedly objected to CIETAC's jurisdiction but, nevertheless, appeared before it, submitting evidence that the contracts which contained the arbitration clause on which Minmetals relied were forged. Chi Mei also argued that Minmetals' flouting of Chinese law should prevent its recovery in the arbitration. Id. at 44-45. The arbitration tribunal held that Chi Mei failed to meet its burden of showing that the contracts at issue were forged, and that even if Chi Mei's signature and stamp had been forged, its actions, such as providing documents to the New York bank and drawing on the letters of credit, constituted "confirmation of the validity of the contracts." Id. at 49. On August 30, 2000, the CIETAC panel awarded Minmetals an amount in excess of $4 million.

In July 2001, Minmetals moved in the district court for an order confirming and enforcing the arbitration award. Chi Mei opposed the motion and filed a cross-motion to deny the relief Minmetals sought, submitting numerous documents and affidavits, including the affidavit of Jiaxiang Luo, the Chi Mei president. Minmetals did not submit any contrary affidavits. The district court heard oral argument on the motions and, without conducting an evidentiary hearing, on June 11, 2002, entered an order granting Minmetals' motion to confirm and enforce the award and denying Chi Mei's cross-motion. The court, however, did not file an opinion explaining its decision and, accordingly, we do not know the basis for its entry of the order. On August 26, 2002, the district court entered judgment in favor of Minmetals in the amount of $4,040,850.41. This appeal followed.

The district court had jurisdiction pursuant to 9 U.S.C. § 203 and 28 U.S.C. § 1331, and we have jurisdiction pursuant to 28 U.S.C. § 1291.7 Ordinarily, in reviewing a district court's order confirming an arbitration award, we would review the district court's factual findings for clear error and its legal conclusions de novo. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995). Here, however, inasmuch as the court, at least explicitly, did not make findings of fact, and we, in any event, are deciding the case on a legal basis, our entire review is plenary.

The primary issue in this case is whether the district court properly enforced the foreign arbitration panel's award where that panel, in finding that it had jurisdiction, rejected Chi Mei's argument that the documents providing for arbitration were forged so that there was not any valid writing exhibiting an intent to arbitrate. This issue actually involves two distinct questions. First, we must consider whether a foreign arbitration award might be enforceable regardless of the validity of the arbitration clause on which the foreign body rested its jurisdiction. In this regard, Minmetals points out that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "Convention") differs somewhat from the general provisions of the Federal Arbitration Act ("FAA"), and particularly argues that Article V of the Convention requires enforcement of foreign awards in all but a handful of very limited circumstances, one of which is not the necessity for there to be a valid written agreement providing for arbitration. If we conclude, however, that only those awards based on a valid agreement to arbitrate are enforceable, we also must consider who makes the ultimate determination of the validity of the clause at issue. Thus, in considering the second question, we must examine the district court's role, if any, in reviewing the foreign arbitral panel's finding that there was a valid agreement to arbitrate.

Within three years after an arbitral award falling under the Convention is made, any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award as against any other party to the arbitration. The court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.

The Convention is incorporated into the FAA in 9 U.S.C. § 207 and appears at 9 U.S.C.A. § 201 historical n. Article V of the Convention provides:

1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

. . . .

(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or

(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

. . . .

2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.

Article IV establishes the procedure for seeking enforcement of an award under Article V:

1. To obtain the recognition and enforcement mentioned in the preceding article, the party applying for recognition and enforcement shall, at the time of the application, supply:

(a) The duly authenticated original award or a duly certified copy thereof;

(b) The original agreement referred to in article II or a duly certified copy thereof.

. . . .

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

2. The term `agreement in writing' shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect to which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Minmetals argues that each article of the Convention governs a different aspect of arbitration procedure — Article II sets forth the grounds for compelling arbitration, Article IV describes the procedure required for seeking enforcement of an award, and Article V provides that once an award is made, the courts of a contracting state must enforce that award unless one of the narrow grounds for nonenforcement is proven. This case, according to Minmetals, therefore involves only Article V, under which in its view "the requirement of a valid written agreement is not necessary for enforcement." Appellee's Br. at 6. Chi Mei, on the other hand, argues that the Convention must be read as a whole and that Article V both explicitly and implicitly incorporates Article II's valid written agreement requirement. In addition, Minmetals argues that the arbitration panel's decision as to the validity of the arbitration agreement is conclusive unless an Article V exception applies, which, it argues, is not the case here. Chi Mei, for its part, argues that the district court had an obligation to determine independently the validity of the agreement.

Because the domestic FAA (chapter 1 of the FAA) is applicable to actions brought under the Convention (chapter 2 of the FAA) to the extent they are not in conflict, 9 U.S.C. § 208, Chi Mei relies heavily on the Supreme Court's decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985. First Options involved the domestic FAA, not the Convention, but involved facts similar to those in this case. In First Options, as here, the district court confirmed an arbitration award where the parties against whom the award was enforced had argued both in the arbitration proceedings and before the district court that they had not signed the document containing the arbitration clause. Id. at 941, 115 S.Ct. at 1922. In that case, the Court held that the district court and not the arbitration panel must decide the question of arbitrability — that is, the question whether a certain dispute is subject to arbitration under the terms of a given agreement — unless the parties clearly and unmistakably have agreed that the arbitrator should decide arbitrability. Id. at 943, 115 S.Ct. at 1923-24. In other words, the Court, relying on the principle that "a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration," id. at 945, 115 S.Ct. at 1925, held that, unless the district court found that there was clear and unmistakable evidence that the parties agreed to arbitrate arbitrability, the district court independently must determine whether the parties agreed to arbitrate the merits of the dispute, id. at 943-45, 115 S.Ct. at 1923-25.

Chi Mei therefore argues that, under First Options, the district court should have concluded that the parties did not agree to arbitrate arbitrability8 and, faced with the evidence presented by Chi Mei in opposition to enforcement and the lack of evidence submitted in response by Minmetals, the district court should have found that the dispute was not arbitrable because the contract had been forged, or at least should have conducted a hearing to resolve that issue. If this case had arisen under the domestic FAA, First Options clearly would have settled in Chi Mei's favor both the question of the need for a valid agreement to arbitrate and the question of the district court's role in reviewing an arbitrator's determination of arbitrability when an award is sought to be enforced. We, therefore, must determine whether First Options provides the rule of decision in a case involving enforcement of a foreign arbitration award under the Convention.

Our cases involving enforcement under the Convention largely have arisen under Article II, with one party seeking an order compelling another party to arbitrate a dispute. Under those cases, it is clear that if Minmetals had initiated proceedings in the district court to compel arbitration, the court would have been obligated to consider Chi Mei's allegations that the arbitration clause was void because the underlying contract was forged. See Sandvik v. Advent Int'l Corp., 220 F.3d 99, 104-07 (3d Cir.2000). It is, of course, true that the FAA, of which the Convention is a part, establishes a strong federal policy in favor of arbitration and that the presumption in favor of arbitration carries "`special force'" when international commerce is involved. Id. at 104 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631, 105 S.Ct. 3346, 3356, 87 L.Ed.2d 444 (1985)). Nonetheless, we have stated that the "`liberal federal policy favoring arbitration agreements... is at bottom a policy guaranteeing the enforcement of private contractual arrangements,'" id. at 105 (quoting Mitsubishi, 473 U.S. at 625, 105 S.Ct. at 3353), and that because "arbitration is a matter of contract, ... no arbitration may be compelled in the absence of an agreement to arbitrate," id. at 107-08 (citing AT & T Techs, Inc. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986)).

In Sandvik, we affirmed the district court's denial of a motion to compel arbitration where the district court had concluded that it had to determine whether the parties in fact had entered into a binding agreement to arbitrate before it could compel arbitration. Id. at 104-07. In that case, there was a dispute as to whether the agreement containing the arbitration agreement was binding on the defendant corporation where it alleged that its attorney signed the contract without proper authorization. Id. at 101-02. We relied on our decision in Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir.1980), in which we stated:

Before a party to a lawsuit can be ordered to arbitrate and thus be deprived of a day in court, there should be an express, unequivocal agreement to that effect. If there is doubt as to whether such an agreement exists, the matter, upon a proper and timely demand, should be submitted to a jury. Only when there is no genuine issue of fact concerning the formation of the agreement should the court decide as a matter of law that the parties did or did not enter into such an agreement.

Id. at 106 (quoting Par-Knit Mills, 636 F.2d at 54).

In Sandvik, we drew a distinction between contracts asserted to be void or nonexistent, as was the case there and is the case here, and contracts alleged to be voidable, in which case arbitration, including arbitration of the fraud question, may be appropriate under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).9 We concluded that "[b]ecause under both the [Convention] and the FAA a court must decide whether an agreement to arbitrate exists before it may order arbitration, the District Court was correct in determining that it must decide whether [the attorney's] signature bound Advent before it could order arbitration." Id. at 107; see also Gen. Elec. Co. v. Deutz Ag, 270 F.3d 144, 152-56 (3d Cir.2001) (affirming district court's decision in case to compel an international arbitration to submit arbitrability question to jury after finding arbitration clause's application to defendant ambiguous). Notably, although we supported our conclusion with references to the "null and void" language in Article II of the Convention, we based our decision on straightforward notions of contract law rather than on any technical interpretation of the language of the treaty. See Sandvik, 220 F.3d at 105-10.

In this case, however, an arbitral tribunal already has rendered a decision, and has made explicit findings concerning the alleged forgery of the contract, including the arbitration clause. "The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries." Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15, 94 S.Ct. 2449, 2457 n. 15, 41 L.Ed.2d 270 (1974). In an oft-cited opinion concerning enforcement of a foreign arbitration award, the Court of Appeals for the Second Circuit noted the "general pro-enforcement bias informing the Convention," explaining that the Convention's "basic thrust was to liberalize procedures for enforcing foreign arbitral awards." Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier, 508 F.2d 969, 973 (2d Cir.1974).

Consistently with the policy favoring enforcement of foreign arbitration awards, courts strictly have limited defenses to enforcement to the defenses set forth in Article V of the Convention, and generally have construed those exceptions narrowly. See, e.g., id. at 973-77; see also Biotronik Mess-und Therapiegeraete GmbH & Co. v. Medford Med. Instrument Co., 415 F.Supp. 133, 136, 140-41 (D.N.J. 1976). As the Court of Appeals for the Second Circuit has noted, "[t]here is now considerable caselaw holding that, in an action to confirm an award rendered in, or under the law of, a foreign jurisdiction, the grounds for relief enumerated in Article V of the Convention are the only grounds available for setting aside an arbitral award." Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys `R' Us, Inc., 126 F.3d 15, 20 (2d Cir.1997) (emphasis added) (citing M & C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844, 851 (6th Cir.1996); Int'l Standard Elec. Corp. v. Bridas Sociedad Anonima Petrolera, Industrial Y Comercial, 745 F.Supp. 172, 181-82 (S.D.N.Y.1990); Brandeis Intsel Ltd. v. Calabrian Chems. Corp., 656 F.Supp. 160, 167 (S.D.N.Y. 1987); Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation 265 (1981)).

This narrow interpretation of the Convention is in keeping with 9 U.S.C. § 207 which unequivocally provides that a court in which enforcement of a foreign arbitration award is sought "shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention." (emphasis added). The absence of a written agreement is not articulated specifically as a ground for refusal to enforce an award under Article V of the Convention. In fact, the Convention only refers to an "agreement in writing" in Article II, which requires a court of a contracting state to order arbitration when presented with an agreement in writing to arbitrate, unless it finds that agreement to be void, inoperative, or incapable of being performed. This distinction, according to Minmetals, is enough to differentiate this case from cases like First Options, which arose under the FAA,10 as well as from cases like Sandvik and Deutz, which arose under Article II.

On the other hand, the crucial principles common to all of these decisions — that arbitration is a matter of contract and that a party can be forced to arbitrate only those issues it specifically agrees to submit to arbitration — suggest that the district court here had an obligation to determine independently the existence of an agreement to arbitrate even though an arbitration panel in a foreign state already had rendered an award, unless Minmetals' argument concerning the exclusive nature of Article V or some other principle provides a meaningful reason to distinguish the cases we have cited. Thus, we consider whether Convention cases cited by Minmetals, which contrast Article II with the stricter Article V, provide a compelling reason to distinguish this case from Sandvik and Deutz. Furthermore, there is some question whether the culture of international arbitration, which informs the structure, history, and policy of the Convention, provides a basis for distinguishing this case from First Options.

With regard to the first question, we are not convinced by Slaney v. International Amateur Athletic Federation, 244 F.3d 580 (7th Cir.2001), or by Yusuf Ahmed Alghanim, both cited by Minmetals, that the absence from Article V of the lack of a valid written agreement as a ground for refusal to enforce an award is fatal to Chi Mei's contention that forgery of the arbitration agreement should preclude its enforcement. In Slaney, the Court of Appeals for the Seventh Circuit held that a foreign arbitration award should be enforced against the plaintiff despite her argument that there was not a valid "agreement in writing" as required by Article II of the Convention. The court explained:

Assuming that this case had come to the district court and the IAAF had sought to compel Slaney to arbitrate her claims, a determination as to whether there had been a writing might pose a barrier to the IAAF's position. However, that is not the case. Here, an arbitration has already taken place in which, as we have determined, Slaney freely participated. Thus, the fact that Slaney suggests there is no written agreement to arbitrate, as mandated by Article II of the New York Convention is irrelevant. See, e.g., Coutinho Caro & Co., U.S.A., Inc. v. Marcus Trading Inc., 2000 WL 435566 at *5 n. 4 (D.Conn. March 14, 2000) (recognizing a difference between the situation where a party seeks to compel arbitration and a situation in which one attempts to set aside an arbitral award that has already been issued). What is highlighted here is the difference between Article II of the Convention, which dictates when a court should compel parties to an arbitration, and Article V, which lists the narrow circumstances in which an arbitration decision between signatories to the Convention should not be enforced.

Id. at 591. The court went on to apply ordinary rules of contract law in holding that the plaintiff was estopped from arguing that the lack of a binding written agreement precluded enforcement because she had participated freely in the arbitration proceeding, had not argued that she never agreed to the arbitration clause during those proceedings, and had let the opportunity to do so pass by when she withdrew from those proceedings. Id. The court also considered certain defenses to enforcement under Article V but rejected all of them. Id. at 592-94.

Minmetals relies on Slaney for the proposition that lack of a valid written agreement to arbitrate is irrelevant to enforcement under Article V, which neither mentions such an agreement nor explicitly incorporates the written agreement requirement of Article II. We, however, will not apply Slaney in the way Minmetals suggests. First, it appears that the language in Slaney suggesting that lack of a written agreement is irrelevant in an Article V case is dicta. The court rested its decision primarily on an estoppel theory because Slaney had participated freely in the arbitration without arguing that lack of a written agreement to arbitrate deprived the arbitral tribunal of jurisdiction. Id. In applying estoppel principles, the court stated: "We see no reason why, even in the absence of a writing, ordinary rules of contract law should not apply." Id. In this case, as we discuss below, Chi Mei continually objected to the arbitration panel's jurisdiction and always has maintained that the purchase contracts were forged. Estoppel is therefore not applicable in this case. Moreover, the court in Slaney did not discuss First Options in considering Slaney's position with regard to the alleged lack of a written agreement to arbitrate.11

Minmetals' reliance on Yusuf Ahmed Alghanim likewise is misplaced. In that case, the court distinguished between awards rendered in a foreign state and awards rendered in the state in which enforcement is sought, holding that a court may consider implied grounds of relief under the FAA, such as the arbitrator's manifest disregard of the law, when asked to enforce an award rendered in the United States under the Convention. Yusuf Ahmed Alghanim, 126 F.3d at 20-23. The court stated:

In sum, we conclude that the Convention mandates very different regimes for the review of arbitral awards (1) in the state in which, or under the law of which, the award was made, and (2) in other states where recognition and enforcement are sought. The Convention specifically contemplates that the state in which, or under the law of which, the award is made, will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief. See Convention art. V(1)(e). However, the Convention is equally clear that when an action for enforcement is brought in a foreign state, the state may refuse to enforce the award only on the grounds explicitly set forth in Article V of the Convention.

Id. at 23.

At first blush, Yusuf Ahmed Alghanim might appear to support Minmetals' position as it holds that awards rendered in a foreign state must be enforced unless one of the specific narrow exceptions in Article V is proven, while a United States court may refuse to enforce an award rendered in the United States or under United States law on other grounds implied under the FAA. First Options is, of course, a case under the FAA, and Minmetals suggests that it is therefore irrelevant here as the award in this case was made in a foreign state. First Options, however, did not involve an implied ground for relief under the FAA. Rather, it involved the more fundamental question of wh