Arbitration - USA
US court awards cost of enforcement proceedings
Authors
Contributed by K&L Gates
JP Duffy
November 14 2013
Background
Costs in US enforcement proceedings
California Civil Code Section 1717
Comment
In Latinamerican Theatrical Group, LLC v Swen International Holding(1) a US federal
court awarded the prevailing party in an arbitration the costs that it had incurred in
enforcing the arbitral award. Latinamerican Theatrical is significant for international
arbitration practitioners because it reinforces the need to draft arbitration clauses
thoughtfully and to consider enforcement issues when doing so.
Erica R Iverson
Background
The underlying dispute in Latinamerican Theatrical concerned the breach of a film
distribution agreement entered into between a Florida film distributor and a
Panamanian licensor. In the underlying dispute, the claimant alleged that the
respondent had anticipatorily breached the distribution agreement by unilaterally
terminating it and then violating the claimant's exclusive distribution rights.
In accordance with the arbitration clause contained in the distribution agreement, the
claimant commenced arbitration before the Independent Film and Television Alliance.
In relevant part, the arbitration clause provided that:
"Any dispute arising out of this Agreement will be resolved by binding arbitration
under the IFTA Rules of International Arbitration in effect at the time the notice of
arbitration is filed; provided, however, that Distributor expressly acknowledges
and agrees that Licensor shall be entitled to injunctive or other equitable relief
(an 'Injunction') to restrain, prevent or enjoin any breach by Distributor of this
Agreement and Distributor hereby waive any right to notice of any action or
proceeding for an Injunction and consents to and accepts entry of an Injunction
in any court which may have jurisdiction in connection therewith. The prevailing
party in any arbitration or other legal proceeding brought pursuant hereto shall
be entitled to recover all of its attorneys' fees. Unless otherwise stated herein,
this Agreement shall be governed by and interpreted in accordance with the
laws of the State of California (without regard to the conflicts of law provisions
thereof), and Distributor hereby submits to the jurisdiction of the state and
federal courts located in Los Angeles County, California."
The claimant eventually prevailed in the arbitration and obtained an award on the
merits, granting it damages for breach of the distribution agreement, attorneys' fees
and post-award interest. The claimant subsequently petitioned a federal trial-level court
in California to enforce the award pursuant to Chapters 1 and 2 of the Federal
Arbitration Act.(2) The respondent thereafter filed a cross-motion to vacate the award.
The trial court granted the claimant's petition to confirm the arbitral award and denied
the respondent's motion to vacate, after which the claimant moved for the costs that it
had incurred in the enforcement proceedings themselves. The court granted the
claimant's request for costs, including attorneys' fees.(3)
Costs in US enforcement proceedings
The general rule in US court proceedings is that each party bears its own costs,
including attorneys' fees. Proceedings under the Federal Arbitration Act to confirm
arbitral awards are no different, and parties seeking to enforce arbitral awards in the
United States must generally assume the expense of doing so.
However, exceptions to the US rule exist that permit parties to recover the costs of
enforcement proceedings. For instance, parties may recover their costs in enforcement
proceedings if the party opposing confirmation lodges frivolous defences that
improperly delay confirmation of the award. The general theory behind such costs
awards is that "[w]hen a party who loses an arbitration award assumes a never-say-die
attitude and drags the dispute through the court system without an objectively
reasonable belief it will prevail, the promise of arbitration is broken".(4)
Parties may also recover the cost of enforcement proceedings if the contract containing
the arbitration clause provides for it. Finally, parties may be awarded enforcement costs
if a statute permits them to recover those costs. In Latinamerican Theatrical the court
employed the latter two exceptions to abrogate the traditional US rule and award the
claimant its enforcement costs.
California Civil Code Section 1717
To justify the award of enforcement costs, the court in Latinamerican Theatrical first
looked to a California state law codified as Section 1717 of the California Civil Code. In
relevant part, Section 1717 permits parties to recover attorneys' fees in contract actions
"where the contract specifically provides that attorney's fees and costs, which are
incurred to enforce that contract, shall be awarded either to one of the parties or to the
prevailing party".
The court next looked to the language of the arbitration clause itself and determined that
it permitted the court to award attorneys' fees in actions brought under the distribution
agreement. Specifically, the court found that the language stating that "[t]he prevailing
party in any arbitration or other legal proceeding brought pursuant hereto shall be
entitled to recover all of its attorneys' fees" authorised it to award attorneys' fees.
Finally, the court reasoned that "confirmation proceedings qualify as an 'other legal
proceeding brought pursuant' to the Distribution Agreement", and that the respondent
had necessitated those enforcement proceedings by failing to comply voluntarily with
the award. Accordingly, the court concluded that Section 1717 and the language of the
arbitration clause collectively justified awarding the claimant the costs of the
enforcement proceedings.
Comment
Latinamerican Theatrical reinforces the need to draft arbitration clauses thoughtfully
and to consider enforcement issues when doing so. For instance, if parties wish to
recover the costs of US court proceedings related to an arbitration, they should
expressly provide for that possibility in the arbitration clause itself.
Similarly, if parties anticipate enforcement in a jurisdiction such as California,
considering statutes such as Section 1717 of the California Civil Code when drafting
the clause is critical. That statute not only allows parties to recover attorneys' fees in
contract actions, but essentially invalidates provisions that permit only one party to
recover attorneys' fees by extending that right to both parties.(5) Notably, as
Latinamerican Theatrical demonstrates, the provision can also be employed to
abrogate the traditional US rule on costs in enforcement proceedings.
Successful award enforcement begins when the arbitration clause is drafted and
Latinamerican Theatrical reinforces the need to consider enforcement issues at the
time of drafting.
For further information on this topic please contact JP Duffy or Erica R Iverson at K&L
Gates by telephone (+1 212 536 3900), fax (+1 212 536 3901) or email (
JP.Duffy@klgates.com or erica.iverson@klgates.com). The K&L Gates website can be
accessed at www.klgates.com.
Endnotes
No 2:13-cv-01270-CAS-(RNBx), 2013 US Dist LEXIS 145674 (CD Cal October 7
2013).
(1)
Chapter 1 of the Federal Arbitration Act generally governs domestic arbitrations in the
United States; Chapter 2 implements the 1958 United Nations Convention on the
Enforcement of Foreign Arbitral Awards.
(2)
The respondent did not oppose the claimant's request for the costs of the
enforcement proceedings.
(3)
BL Harbert Int'l, LLC v Hercules Steel Co, 441 F3d 905, 913 (11th Cir 2006); see
"Court sanctions counsel for frivolous challenge to arbitration award".
(4)
See LaFarge Conseils et Etudes, SA v Kaiser Cement & Gypsum Corp, 791 F2d
1334, 1339 (9th Cir 1986) (concluding that Section 1717 extended the contractual right
of one party to recover attorneys' fees to the counterparty in enforcement proceedings).
(5)
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