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Often times legal disputes can involve foreign entities or even foreign laws. Where these disputes also deal with the United States, domestic laws will come into play. In 1958, the United Nations adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is also called the New York Convention. It requires contracting state courts to give effect to agreements to arbitrate and to recognize arbitration awards. Indeed, parties can enforce international arbitration awards in the United States through federal courts. However, as Toho Towa, Ltd. v. Morgan Creek Productions demonstrates, state procedural laws can help parties collect international awards.
What Did the Court Hold in Toho Towa, Ltd. v. Morgan Creek Productions?
In this case, the Second District Court of Appeal applied an international arbitration award and allowed the claimant to enforce the award against a parent company that did not participate in the initial arbitration. The claimant in this case was Toho Towa, Ltd., a Japanese corporation. Morgan Creek International B.V., a Dutch entity, and Morgan Creek International Ltd., a Bermuda corporation were the original respondents. The dispute involved an agreement among Morgan Creek International BC, the signatory; Morgan Creek International, Ltd., the guarantor; and Toho Towa, Ltd. The agreement dealt with the right to distribute the movie “The Good Shepherd” in Japan. The original arbitration award rewarded over $5 million to the claimant. Toho Towa then petitioned a California state court to confirm the award. According to California law, (Code of Civil Procedure § 1287.4) the international arbitration award effectively became a court judgment. However, Toho Towa soon learned that the subsidiary companies did not have the resources to satisfy the judgment. Once again, Toho Towa petitioned the California courts to add the parent company, Morgan Creek Productions, as a debtor on the judgment. This meant that the parent company would now be liable for the full judgment.
When Can We Add Additional Parties to Arbitral Awards?
After a party successfully converts an arbitration award to a state court judgment, the regular rules of enforcing judgments apply. In certain circumstances, a party can then petition the court to amend the judgment to add a new third party. The courts will consider two issues to determine whether it is appropriate to add a party that did not participate in the original arbitration. First, the new party must be shown to be the alter ego of the original party, such that it is appropriate to “pierce the corporate veil” and hold a parent company liable. The concept of piercing the corporate veil is a legal standard that allows courts to hold officers or shareholders responsible for the rights or obligations of the corporation. Typically, the “veil” protects officers and shareholders from personal liability. Second, the party to be added must have controlled the initial arbitration, such that it had the opportunity to exercise its due process rights to protect itself. In this case, Toho Towa was able to satisfy both prongs of this test. Accordingly, the Second District Court of Appeal added the parent company, Morgan Creek Productions, to the judgment. In the realm of international arbitration awards, this case demonstrates how state law can affect enforcement of international arbitration awards.
At the Law Offices of Salar Atrizadeh, we are knowledgeable and experienced in a wide range of areas dealing with international law and arbitration. To further discuss enforcement of international arbitration awards in the United States under both state and federal law, you may contact us to speak to an attorney today.