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Arbitration: Third Circuit Backs District Court in Modifying an International Award (Web)

The Third U.S. Circuit Court of Appeals allowed a slight altering of an international arbitration award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards in Admart AG v. Stephen and Mary Birch Foundation Inc., No.04-4014 (3d Cir. Aug. 8, 2006)(available at It permitted confirmation of an award, with some modification–in the Third Circuit’s words, “flexibility to modify execution of an award without altering its substance.”

The case arises out of a 1990 agreement entered by Stephen and Mary Birch Foundation Inc, a Delaware nonprofit, and Admart AG, a Swiss corporation, and another company and two individuals, to buy “Luna Luna,” an art exhibit created by about 30 artists.

As per the 1990 sale agreement, the aggregate price for the artworks was $6 million, including a fee for the U.S. license rights. Birch paid Admart $3 million, leaving $2 million to be paid after the art work was delivered to San Diego. After set up, another $1 million was to be paid by the end of 1992's first quarter.

The sale agreement was governed by Swiss law and contained a provision stating that arbitration would take place in Zurich. Among other things, the agreement also provided an indemnity clause under which Admart agreed to provide evidence of the art’s authenticity and to indemnify Birch "from all claims from the artists, prior owners and lessees."

Furthermore, the agreement entitled Birch to "examine the basic contracts" between Admart and the artists. The agreement also established the two individuals named in the suit, Andre Heller and Stefan Seigner, as guarantors, for $500,000, in case Admart was unable fulfill the agreement.

A month after the original agreement, in July 1990, the parties executed an addendum that confirmed that the each of the artists had conveyed their ownership and the use of their original artwork to Admart, as well as the right to transfer the artwork to third-parties. The amendment also warranted that Admart 's agreements with the artists would not restrict Birch's ownership of “Luna Luna” or its use within the United States.

But in October 1991, Birch rescinded the contract, contending it hadn’t received sufficient documentary evidence of Admart's “clear title” to Luna Luna. Admart denied a breach, and the parties commenced arbitration in Zurich.

In 1994, the arbitration panel held that Birch's recission was invalid because Admart had no obligation to provide “clear title” until the Luna Luna delivery date. Moreover, there was no intention of the parties to demand for clear title.

The parties failed to comply with the award’s directions regarding payments and artwork deliveries. Birch appealed to the Swiss Federal Supreme Court complaining that, among other things, the arbitrators' refused to allow inspection of the artworks before the transfer.

The Swiss court, on Feb. 16, 1996 affirmed the award stating that a $1 million “holdback” was intended to adjust any claim for damage to the goods. But the Swiss court didn’t make a ruling on the award’s enforcement.

While the Swiss appeal was pending, in June 1995, Admart filed a suit in a Delaware U.S. District Court seeking the award’s confirmation of the award under the Convention. The federal court stayed the confirmation proceedings pending the Swiss appeal.

In 1999, Birch's representatives attempted to examine the art in Vienna but were denied access by Admart. Birch then filed an award enforcement petition in the Austrian courts, which was dismissed in May 2002, “apparently on the ground that, as the loser in the arbitration, Birch lacked standing to seek enforcement of the Award,”according to the Third Circuit opinion.

While the Austrian case was pending, Birch filed a request for a second arbitration in Switzerland, claiming damages for Admart's failure to comply with the award. In the meantime, the Delaware District Court lifted its stay of the confirmation proceedings in 2003, and in January 2004, it required Birch and Admart to satisfy the award requirements. In June 2004, it confirmed the award, directing Birch to pay about $5.6 million to Admart, plus interest. The court also directed that within 24 hours of receipt, Admart should deliver containers holding the artwork to Birch after repairing any minor damages.

On March 21, 2005, the second arbitration panel in Switzerland decided that it had jurisdiction over “several” of Birch's damages claims since the Award was delivered in 1994, but the panel made no ruling on the merits of Birch's claims.

Birch appealed the District Court's confirmation decision, asserting that all the proceedings be stayed pending resolution of the Switzerland arbitration. In addition, Birch filed a separate “Motion to Adjourn the Decision on Enforcement of the 1994 Arbitration Award” under Article VI of the Convention.

The appellate court declined Birch's request to adjourn the appeal, and affirmed the District Court's decision to deny further delay. The Court mentioning Hewlett-Packard Co. Inc. v. Helge Berge, Etc., 61 F.3d 101 (1st Cir. 1995), reasoned that the issues to be arbitrated in Switzerland do not overlap those in the case before it, which was limited to the award’s enforcement.

The Third Circuit distinguished the claims instituted before the arbitration panel, which involved actions or harm that Birch alleged occurred post-1994 award and as a result were not within the ambit of Admart's suit to confirm.

On June 5, 2005, the Swiss arbitration panel “reached the same conclusion,” according to the Third Circuit, when Admart sought to stay the arbitration until the Third Circuit case was completed.

Birch's main arguments before the Third Circuit were "that the District Court improperly modified the Award by abrogating simultaneous performance, failing to require the artist's documentation be transferred, failing to honor the $1 million hold back and failing to stay confirmation in light of the pending second arbitration proceeding in Switzerland."

Admart contended that "Birch waived its argument that the opinion of the Swiss Federal Supreme Court supports concurrent performance."

The unanimous panel opinion, written by Joseph f. Weis Jr., reviewed the district court's interpretation of the Convention, noting the importance of the policy favoring enforcement of foreign arbitral awards. The opinion discussed the United States’ 1970 accession to the Convention.

The opinion explains that the district court's have a limited role under the Convention, noting they must confirm foreign arbitral awards unless one of the grounds for refusal specified in the Convention applies. The Court describing in detail Article V, which contains the grounds, and said that the courts in earlier occasions have strictly and narrowly applied the defenses to recognition and enforcement of an award.

The opinion cites several decisions illustrating the policy favoring enforcement of foreign arbitral awards, and strict application of Article V. The appeals court analyzed Ministry of Defense of the Islamic Republic of Iran v. Gould Inc., 969 F.2d 764 (9th Cir. 1992), and Parsons & Whittemore Overseas Co., Inc. v. Societe Generale de L’Industrie du Papier (RAKTA), 508

F.2d 969 (2d Cir. 1974), which together “indicate that there is a distinction between the substance of a foreign arbitral award and its execution.”

The opinion notes that in the cases, the arbitrator's decision was not treated with “brittle rigidity” but was approached with some flexibility to modify the award’s execution without altering its substance.

The appellate court said that the leeway “is very small and is available only in limited circumstances so as not to interfere with the Convention's clear preference for confirmation of awards.”

So, the Third Circuit confirmed the award, noting that some of the District Court’s rulings in its confirmation of the award were slightly different. It also modified the Oct 2004 order, citing the fact that some of the terms of execution of the Award varied from those set out by the arbitration panel. “The passage of ten years from the rendition of the Award and the date of the District Court’s confirmation order understandably necessitated some deviation from the original terms of execution,” the opinion notes, adding, “Any modification, however, should adhere as closely to the text of the Award as feasible.”

It noted that the District Court's confirmation order should have adhered more closely to the award. One appellate panel modification agreed with Brich, providing the holdback of $1 million even though the initial eight-month set-up period had expired.

The Third Circuit also warned the parties that they have submitted themselves to the jurisdiction of the Delaware U.S. District Court, and a failure to follow the lower court’s orders may result in contempt sanctions.

–Ongmu Tshering, CPR Intern