Pre-award attachment in aid of arbitration

By Vivek Vashi, Bharucha & Partners
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In re Sojitz Corporation v Prithvi Information Solutions Limited, a five-judge bench of the New York Supreme Court (Appellate Division) held that local assets belonging to a foreign party that has no contact with the state of New York can be attached as part of a pre-arbitration award.

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

Brief facts

Sojitz Corporation entered into a contract with Prithvi Information Solutions Limited (PISL) to provide telecommunications equipment to PISL in India. Sojitz is headquartered in Tokyo and PISL is at Hyderabad. Sojitz was to receive payment through an escrow account with Punjab National Bank in India, into which PISL was to deposit money according to the contract. The contract was governed by English law and provided for dispute resolution through arbitration in Singapore.

Sojitz alleged that it received only a tenth of the total alleged payment due. Sojitz also alleged that payments intended for the escrow account were being allegedly diverted.

Action in New York

Before the arbitration began, Sojitz moved an ex parte order before the New York Supreme Court (NYSC) to attach PISL’s assets for US$40 million. Sojitz argued that arbitration would commence in Singapore within 30 days of the order of attachment and that PISL might attempt to dissipate assets in the time it took to constitute an arbitral tribunal.

The NYSC ordered attachment to secure an amount of US$40 million. The NYSC also ordered Sojitz to post US$2 million bond to cover potential damages to PISL if the arbitration failed or if the attachment was found to be unwarranted.

Vehement reactions

PISL opposed the attachment order arguing NYSC lacked jurisdiction as it had a) no offices or assets in New York, and b) no licence to carry on business or hire employees in New York. PISL clarified that it had three or four customers who together contributed about 1.4% of its annual revenue.

It also strongly contended that as it did not conduct any business in New York in connection with the contract in question, there was no minimum level of contact with the state of New York for the NYSC to attach its assets.

Toning it down

Subsequently, the NYSC in September 2009 vacated the US$40 million attachment. While doing so it confirmed an attachment of US$18,480 for a period of 90 days and also reduced the US$2 million bond to US$900. The court also permitted Sojitz to move to attach additional assets if found in New York. At the same time on Sojitz’s application, the court discharged the bond.

Appeal and arguments

PISL appealed the NYSC’s order granting pre-award attachment and reducing the bond amount to US$900. It argued that the court lacked in personam jurisdiction as it did not have the required minimum contact with New York.

While doing so PISL cited International Shoe Co v Washington (which held that state court’s exercise of in personam jurisdiction would be satisfied only if the defendant had minimum contacts with the state) and Shaffer v Heitner (which held that in quasi rem actions the state will have jurisdiction if the plaintiff’s claim is directly related to the property and in the event the property has no nexus with cause of action then jurisdiction depends on plaintiff having other contacts with the state). Sojitz opposed the appeal on the basis that it would be ineffective, as the attachment order was dissolved and bond was discharged.

Court’s reasoning

Rejecting Sojitz’s plea of non-maintainability of appeal the Supreme Court Appellate Division (SCAD) upheld the NYSC’s jurisdiction to issue pre-award attachment.

It noted that section 7502(c) of New York Civil Practice Law and Rules empowers the New York courts “to issue preliminary injunctions and attachments in aid of all arbitrations including those involving foreign parties or in which the arbitration is conducted outside of New York, provided the award to which the applicant may be entitled would otherwise be rendered ineffectual without such provisional relief.” The only defence available to PISL, which it did not avail of, was to show that the award will not be rendered ineffectual even if the provisional relief is rejected.

Regarding PISL’s contention on absence of minimum contact with the state of New York and lack of in personam jurisdiction, the appeal court said: “attachment for security pending litigation in a proper out-of-state forum does not raise the same due process concerns as are implicated by attach-ment for jurisdictional purposes.”

The SCAD held that it is proper to attach local assets belonging to a party to secure payment of an eventual judgment against that party, subject to entitlement of such reliefs. Accordingly, it confirmed the NYSC’s order.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.

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