Law School Notes•Remedial Law

Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier (RAKTA)

July 31, 2023 by Vala No Comments

508 F.2d 969; December 23, 1974

FACTS:

In 1962, Parsons & Whittemore Overseas Co., Inc., (Overseas) entered into a construction agreement with Societe Generale de L’Industrie du Papier (RAKTA), to construct, and manage and supervise for 1 year a paperboard mill in Alexandria, Egypt. The Agency for International Development (AID), a branch of the United States State Department, would finance the project by supplying RAKTA with funds with which to purchase letters of credit in Overseas favor.

Among the contract’s terms was an arbitration clause, which provided a means to settle differences arising in the course of performance, and a “force majeure” clause, which excused delay in performance due to causes beyond Overseas’ reasonable capacity to control.

In 1967, the Arab-Israeli Six Day War took place. To demonstrate support to Syria, the Egyptian government broke diplomatic ties with the United States and ordered all Americans expelled from Egypt except those who would apply and qualify for a special visa.

Due to this, the project was abandoned and Overseas had notified RAKTA that such postponement is excused under the force majeure clause. RAKTA disagreed and sought damages for breach of contract and invoked the arbitration clause.

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The dispute was brought to a three-man arbitral board governed by the Rules of the International Chamber of Commerce. After hearings, the tribunal made its final award and held Overseas liable to RAKTA for $312,507.45 in damages for breach of contract and $30,000 for RAKTA’s costs; additionally, the arbitrators’ compensation was set at $49,000, with Overseas responsible for three-fourths of the sum. It recognized Overseas’ force majeure defense as good only from May 28 to June 30, 1967. Overseas had made no more than a perfunctory effort to secure special visas and AID’s notification that it was withdrawing financial backing did not justify Overseas’ unilateral decision to abandon the project.

Overseas sought declaratory relief judgment to prevent RAKTA from collecting the award out of a letter of credit issued in RAKTA’s favor by Bank of America at Overseas’ request. Overseas appealed this decision and argued that: (i) the enforcement of the award would violate US public policy; (ii) the award represents a decision on matters not appropriate for arbitration; (iii) the Arbitral Tribunal denied Overseas an adequate opportunity to present its case; (iv) the award is predicated upon the resolution of issues outside the scope of the contractual agreement for arbitration, and (v) the award is in manifest disregard of the law. The United States Court of Appeals for the Second Circuit confirmed the district court’s decision and confirmed the award.

ISSUE/S:

(1) Whether the enforcement of the award would violate US public policy – since Overseas’ returning to work will allegedly contravene United States public policy.

(2) Whether the subject matter is not capable of settlement by arbitration

(3) Whether Overseas was not given adequate opportunity to present defense, therefore enforcement of arbitral award can be denied.

HELD:

(1) NO. Article V(2)(b) of the Convention allows the court in which enforcement of a foreign arbitral award is sought to refuse enforcement, if “enforcement of the award would be contrary to the public policy of [the forum] country.” The Convention’s public policy defense should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state’s most basic notions of morality and justice.

To deny enforcement of this award largely because of the United States’ falling out with Egypt in recent years would mean converting a defense intended to be of narrow scope into a major loophole in the Convention’s mechanism for enforcement

(2) NO. The mere fact that an issue of national interest may incidentally figure into the resolution of a breach of contract claim does not make the dispute not arbitrable. Furthermore, even were the test for non-arbitrability of an ad hoc nature, Overseas’ situation would almost certainly not meet the standard, for Overseas grossly exaggerates the magnitude of the national interest involved in the resolution of its particular claim. Simply because acts of the United States are somehow implicated in a case one cannot conclude that the United States is vitally interested in its outcome.

There is no special national interest in judicial, rather than arbitral, resolution of the breach of contract claim underlying the award in this case.

(3) NO. Under Article V(1)(b) of the Convention, enforcement of a foreign arbitral award may be denied if the defendant can prove that he was “not given proper notice . . . or was otherwise unable to present his case.”

The due process claim fails for several reasons. First, the inability to produce one’s witnesses before an arbitral tribunal is a risk inherent in an agreement to submit to arbitration. By agreeing to submit disputes to arbitration, a party relinquishes his courtroom rights-including that to subpoena witnesses-in favor of arbitration “with all of its well-known advantages and drawbacks.”

Secondly, the logistical problems of scheduling hearing dates convenient to parties, counsel, and arbitrators scattered about the globe argue against deviating from an initially mutually agreeable time plan unless a scheduling change is truly unavoidable. Overseas’ allegedly key witness was kept from attending the hearing due to a prior commitment to lecture at an American university – hardly the type of obstacle to his presence which would require the arbitral tribunal to postpone the hearing as a matter of fundamental fairness to Overseas.

The arbitration tribunal acted within its discretion in declining to reschedule a hearing for the convenience of an Overseas witness. Overseas’ due process rights under American law, rights entitled to full force under the Convention as a defense to enforcement, were in no way infringed by the tribunal’s decision.

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Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier (RAKTA)

FACTS:

ISSUE/S:

HELD:

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