Abstract

The enforcement of an arbitral award is a streamlined procedure that is supposed to be completed in a short period of time. This is because all the parties' rights, obligations, claims, and defenses are deemed to have been evaluated and unequivocally resolved by the arbitral tribunal in a final award. Accordingly, the New York Convention clearly restricts the grounds on which the enforcement actions may be resisted or challenged by a losing party, and the requirements that a court must evaluate before an award is accepted, enforced, or refused by a losing party.

This article examines whether a losing party may attempt to contest the execution or confirmation of an arbitral award by bringing a counterclaim or a set-off against the awarding party. There has been a long dispute about why courts of enforcement should allow or dismiss a counterclaim or set-off in an enforcement process, and the reasons for doing so. It has been noticed, however, that the decision on whether or not to accept or refuse admissibility of a counterclaim or set-off in an enforcement of arbitral award proceeding varies on the jurisdiction in which the enforcement or confirmation of the award is sought.

Keywords: "arbitral", "award", “convention”, "counterclaim," “decision” "enforcement", “grounds”, "jurisdiction", "set-off”, and “summary.

1. Introduction

A proceeding to enforce or confirm an arbitral award is summary in nature[2]. The New York Convention on the recognition and enforcement of foreign arbitral awards 1958 "the NYC" permits only restrictive attack against an arbitral award within the confines of the NYC. The rationale for limiting the grounds to oppose enforcement proceedings is because enforcement or confirmation proceedings of an award is tantamount to a post-judgment proceeding that does not require trial or evidentiary hearing[3]. It is assumed to be brief in character as all the rights, obligations, claims, and defenses are deemed to have all been reviewed and resolved by the arbitral tribunal in a final award. Hence, seeking the confirmation or enforcement of the award is expected to be summarily decided. It is for the above reason that NYC specifically circumscribed the grounds[4] on which the enforcement proceedings may be opposed by a losing party or conditions the court would consider before the award is recognized, enforced, or refused.

It has, however, been observed that in enforcement proceedings, losing parties in seeking to oppose or challenge the proceedings present a counterclaim or a defense of set-off. Interestingly, different courts in the signatory states have reached different conclusions on whether a losing party to a convention award may set off or counterclaim against the enforcement of a Convention award.[5]  From the various courts' decisions in the Contracting States, it appears that the decision to allow a counterclaim or set-off in enforcement proceedings varies with the jurisdiction where the award is sought to be enforced, or the nature of the counterclaim or set-off presented. In other words, the decision to consider the set-off or counterclaim by enforcement court primarily depends on the jurisdiction of the enforcement court and the procedural law of the state of enforcement.[6]

This memorandum will review certain decisions of contracting states where a set-off or counterclaim in the proceedings for enforcement or confirmation of a convention award were considered.

2. Admissibility of a counterclaim or set-off in enforcement proceedings of an arbitral award?

Under the NYC, a party who seeks to oppose or challenge enforcement of a convention award is expected by law to present its arguments within the ambit of Article 111 of the NYC. The grounds were exhaustively stated as follows: a) incapacity of the parties, or invalidity of the agreement; or (b) improper notice of the appointment of the Arbitrator or party was unable to present his case; or (c) the award contains decisions on matters beyond the scope of the submission to arbitration; or (d) irregularity in the composition of the arbitral tribunal; or (e) the award is not yet binding on the parties or has been set aside or suspended by a competent authority or (f) arbitrability of the dispute; or (g) it would be contrary to the public policy to enforce the award. So, whatever process a losing party must file in resisting the enforcement or confirmation of the award, it is expected to be made within any of the listed grounds.

However, it has been witnessed that responding parties to enforcement proceedings of an arbitral award have presented either a counterclaim or a set-off defense. Thus, it becomes relevant to review the decisions of various courts in some jurisdictions where counterclaim and set-off defense have been considered.

 2.01 Counterclaim:

“[T]he Black's Law Dictionary defines a counterclaim as a claim for relief asserted against an opposing party after an original claim has been made; esp., a defendant's claim in opposition to or as a set-off against the plaintiff's claim.—Also termed counteraction; countersuit; cross-demand. In other words, a defendant does not "institute" an action when he asserts a counterclaim.”[7] By its very nature, a counterclaim is considered a separate and independent action and may continue or be granted even when the original claim is dismissed or granted. Therefore, it is typically submitted at the beginning of arbitral proceedings after the Claimant has submitted its original claim.[8]

In Fertilizer Corp. of India[9], the Southern District Court of Ohio, a U.S. court in considering a Petition for confirmation of an arbitral award, held that "a confirmation proceeding is not an original action; it is, rather, in the nature of a post-judgment enforcement proceeding. In such a proceeding, a counterclaim is clearly inappropriate." [10] In Selevision Saudi Company v. Bein Media Group LLC[11], the English court, in reviewing a similar contention on whether a counterclaim may be permitted in the enforcement of an arbitral award under the NYC, enunciated that "[e]nforcement proceedings are clearly intended to be, in the absence of a challenge by award debtor, highly summary and essentially quasi-administrative proceedings. Therefore, to permit counterclaims or other additional claims is likely to thwart or complicate enforcement." The court in denying the counterclaim reasoned that allowing the counterclaim "risks the practical inhibition on the enforcement of such award and it would transform the character of the proceedings which would then require full procedures for significantly contested claim including statements of case, disclosure, witness statements and probably expert evidence."[12] Similarly, in an old English decision of Margulies Bros Ltd v Dafnis Thomaides & Co (U.K.) Ltd.[13] Diplock J. pronounced that “[n]o authority has been cited to me in which the existence of a counterclaim has been held to be a good reason for refusing to allow an award to be enforced as a judgment. I do not think that the existence of a counterclaim is a good reason." 

Conversely, in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc.,[14] the English court held that “[i]t is not every crossclaim which can be deducted. It is only crossclaims that arise out of the same transaction or are closely connected with it. And it is only crossclaims which go directly to impeach the [Claimant's] demands, that are so closely connected with his demands that it would be materially unjust to allow him to enforce payment without taking into account the crossclaim".[15] Similarly, in Whyte and Mackay Ltd v. Blyth & Blyth Consulting Engineers Ltd[16], a Scottish commercial court was stretchy to allow a counterclaim in an enforcement of award proceeding involving declaration on the authenticity of an award.

In a South African case, Industrius D.O.O v IDS Industry Service and Plant Construction South Africa (Pty) Ltd[17], the High Court affirmed that initiating an unsuccessful counterclaim through action procedures before a court constitutes "proverbial flogging a dead horse" and cannot be used as an excuse to postpone the enforcement of the arbitral ruling[18]. The court found that a party's attempt to set off a proven debt under the arbitral award against an untested counterclaim in unconnected proceedings is likewise in violation of the statute and Model Law and that postponing the enforcement of an international arbitral award in either of the latter cases would be contrary to the spirit of the Model Law in South Africa[19]. The court determined that the Respondent failed to allege or prove any of the grounds outlined in section 18 of the South African arbitration law- International Arbitration Act to persuade the court to deny the application to have the arbitration judgement become an order of court.[20]

In my respectful view, counterclaim in Nigeria is classified as a pleading that requires to be proven through trial and evidence[21] and may not constitute a viable basis to resist a proceeding for an enforcement of an arbitral award. This is because enforcement proceeding of an arbitral award in Nigeria is considered summary in nature.

It follows from the above decisions that a Respondent seeking to oppose an enforcement or confirmation of an arbitral award may be given a fair opportunity to submit a counterclaim depending on the jurisdiction where the enforcement proceedings are pending.

2.02 Set-off:

Set-off is a “[m]ode of defense by which the defendant acknowledges the justice of the plaintiff’s demand but sets up a demand of his own against the plaintiff to counter-balance it either in whole or in part.”[22] Setting off a claim against a Claimant's right to money results in the reciprocal extinguishment of both claims, whether in whole or in part, and it is used to defend the entire or a percentage of a claim.[23]. The impact of the set-off is that the losing party acknowledges the validity of the decision but claims that the award should be reduced or that the reward is less than the set-off amount.[24]

However, it does appear that it is not in all cases during enforcement or confirmation of arbitral award that set-off is admissible or permissible. Again, like in counterclaim, it all depends on the jurisdiction of the court of enforcement save that in some circumstances, how the set-off arose is usually considered by the enforcement court.

In Germany, the Federal Court of Justice (BGH), Germany's highest court with statutory jurisdiction to resolve arbitration-related disputes, held[25] “[t]hat in enforcement proceedings in German courts relating to a domestic or foreign arbitral award, the losing party may request for a set-off if it did not arise from an arbitration agreement.”[26] The Berlin Higher Regional Court upheld the award and dismissed the set-off claim in that decision. The court ruled that the set-off was contrary to the enforcement proceedings and lacked jurisdiction. The Respondent then appealed to the Federal Court of Justice (BGH). The Federal Court of Justice held that substantive objections to arbitral award claims in the form of set-off are acceptable in enforcement actions. But, according to the court, the fundamental grounds for the objection must have developed after the arbitration hearings ended. "[T]he court added that the situation is different when the claim on which the set-off is sought falls within the scope of an arbitration agreement, in which case the arbitral tribunal, rather than a court has jurisdiction.”[27]

According to the above German case, it is remarkable and appears to be quite rational to note that for set-off to be considered, it must not have existed during the arbitration process; otherwise, it falls within the competence of an arbitral tribunal. Hence, the set-off is permissible if the debtor wants to set off a claim that occurred either after the arbitration proceedings were completed or outside the arbitration agreement. The decision clarifies that set-off, which is a type of substantive objection, can be admissible during enforcement. The only time this doesn't apply is if the objection itself is covered by an arbitration agreement. Then the arbitrators make the decisions and, not a court of law during enforcement of the award.[28]

Similarly, in Uganda Telecom Limited v. Hi-Tech Telecom Pty Ltd[29], a Federal Court of Australia in a proceeding seeking to enforce a Ugandan award rejected “Hi-Tech’s request to defer enforcement of the award pending determination of its claim for set-off, reasoning that there is no basis under the International Arbitration Act for refusing to enforce a foreign award or for delaying or deferring the enforcement of a foreign award because the party liable under the award has a set-off claim against the other party.” In R & C Electrical Engineers Ltd v. Shaylor Construction Ltd[30] the court held that "there was a contractual right of set-off against an award of a sum that was not yet due for payment."[31]

In contrast, the English court in Workspace Management v. YJL London Limited[32], held that set-off is admissible when the court found that the Claimant owed the Defendant £56,143.35 as a result of an Adjudicator's decision and that the Defendant owed the Claimant the same sum as a result of the Arbitrator's award involving the same parties, same contract. Therefore, relying on the principle of "equitable set-off," the court explained that it was a case of mutual set-off of debts. The court reasoned that, based on the above premise, “[i]t would be manifestly unjust to allow the Claimant to enforce payment without taking into account the set-off based on Adjudication Decision 3”. Therefore, the court held that the principles of equitable set-off applied in that case.

3. Conclusion

What emanates from the foregoing considerations is that a Respondent is generally not permitted to bring a counterclaim or set-off in order to oppose a claim to enforce an arbitral award except the court of enforcement allows it. This is because Article 111 of the NYC extensively lists the reasons for opposing or challenging an arbitral award. The rationale for restricting the grounds for enforcement of a convention award is because arbitral award enforcement proceedings is largely analogous to post-judgment actions that do not entail a trial or evidentiary hearing. Additionally, it is considered as having a short duration, as the arbitral tribunal is believed to have examined and resolved all the parties' rights, responsibilities, claims, and defenses in a final judgment.

The Contracting States seemed to have created exception as the decision on whether or not to admit a counterclaim or set-off in an enforcement proceeding is solely within the exclusive province of the court, which must take into consideration the procedural law of the Contracting State that sets out the requirements for either the admissibility or denial of the counterclaim or set-off in the enforcement proceeding.

In my considered opinion, courts in all Contracting States should exercise caution when deciding whether to accept or deny a counterclaim or set-off in enforcing a convention award if doing so may result in the reopening of proceedings, which invariably necessitates an evidentiary hearing or discovery requests. Otherwise, admitting counterclaim or set-off in all enforcement proceeding of a convention award will inevitably modify the brevity of the proceeding.

_______________________________

 *Young ICCA Scholar. A Fellow of Chartered Institute of Arbitrators, U.K.; Prime Dispute U.K.; Arbitrators’ and Mediators’ Institute of New Zealand; and Malaysian Institute of Arbitrators. He earned his Master of Laws (LL.M.) degree in International Arbitration at the University of Miami, School of Law, Florida, United States of America.

[2] Imperial Ethiopian Gov't v. Baruch-Foster Corp., 535 F.2d 334, 335 (5th Cir. 1976).

[3] Fertilizer Corp. of India v. IDI Management, Inc., 517 F. Supp. 948 (S.D.Ohio 1981).

[4] Article 3 of the New York Convention on the recognition and enforcement of foreign arbitral awards 1958.

[5] A.J. van den Berg, “New York Convention of 1958- Annotated List of Topics (2013).”

[6] Mathias Scherer and Sam Moss, ‘Resisting Enforcement of a Foreign Arbitral Award under the New York Convention.” IPBA Journal No. 51, September 2008.

[7] In re Am. Home Mortg. Assets Trust 2007-5, 2019 Minn. App. Unpub. LEXIS 267 2019 WL 1431923.

[8] Id.

[9] 517 F. Supp. 948 at 949.

[10] Id. at 963

[11](2021) EWHC 2802 Comm. https://jusmundi.com/en/document/pdf/decision/en-selevision-saudi-company-v-bein-media-group-llc-judgment-of-the-high-court-of-justice-of-england-and-wales-2021-ewhc-2802-friday-22nd-october-2021.

[12] Id.

[13] [1958] 1 Lloyds Rep 250: Christopher Hill and Steve Abraham, Norton Rose, “Adjudication and Arbitration Set-Off” Lexology (2006).

[14] (1978) 1 QB 927

[15] Id.

[16] (2012) CSOH 79; 2012 G.W.D. 17-3433.

[17] (2020/15862) [2021] ZAGPJHC 350 (20 August 2021)

[18] Id.

[19] Andrew Fawcett, “South African court reaffirms stance on enforcement of arbitral awards.” 23 September 2021.

[20] (2020/15862) [2021] ZAGPJHC 350 (20 August 2021)

[21] Elder P.E. Biko & Anor. v. Sir. Uche Amaechi (2018) LPELR-45069 (CA)

[22] Bryan A. Garner, “Black’s Law Dictionary, 11th Edition, 2019.”

[23] Alexis Mourre, “The Set-off paradox in International Arbitration.” Arbitration International, Volume 24, Issue 3, 1 September 2008, Pages 387–404.

[24] Vladimir Pavic, “Counterclaim and Set-Off in International Commercial Arbitration.” Annals, International Edition pp. 101-116 (2006).

[25] 28 July 2005- Court of Appeal [Oberlandersgericht] Koblenz in Albert Jan van den Berg (ed) Yearbook Commercial Arbitration 2011- Vol. XXXI, (Kluwer Law International 2006) pp. 673-678.

[26] Stephan Wilske and Claudia Krapfl, Gleiss Lutz, “Federal Court of Justice on set-off in enforcement proceedings.” Germany International- 28 September 2010. 

[27] Germany No. 138, Seller v. Buyer, Bundesgerichtshof, 30 Sept. 2010 in Albert Jan Van Den Berg (ed), Yearbook Commercial Arbitration 2011- Vol. XXXVI, Vol. 36, Kluwer Law Int’l; ICCA & Kluwer Law Int’l 2011 pp. 279-281.

[28] Stephan Wilske and Claudia Krapfl, Gleiss Lutz; “Set-off in enforcement proceedings possible if claims not subject to arbitration.” Thomson Reuters Practical Law.

[29] Australia No. 36 Federal Court of Australia, New South Wales District Registry, General Division, 22 February 2011 in Albert Jan van den Berg (ed) Yearbook Commercial Arbitration 2011- Vol. XXXVI, (Kluwer Law International 2011) pp. 252-255.

[30] (2012) EWHC 1254 TCC:

[31] Kenneth T. Salmon, “The International Journal of Arbitration, Mediation and Dispute Management.” (2012)

[32] (2009) EWHC 2017 (TCC): See also Georgia Corporation v. Gavino Supplies (UAE) Fze [2016] DIFC ARB 005.