June 16, 2014 Articles

Is an Arbitral Award Entitled to Collateral Estoppel Effect?

By Monique Sasson

In an international commercial dispute, the U.S. District Court for the Eastern District of Pennsylvania (the district court) had to establish the effect of an Italian court judgment that confirmed an arbitral award over the defendant Pirito's appeal. Pirito v. Penn Engineering World Holdings, No. 09-2396 (E.D. Pa. May 16, 2013).

Background and Procedural History
The case arose from a stock purchase agreement (SPA) executed in 2003, whereby Penn Engineering World Holdings (Penn World) purchased from Pirito the outstanding capital stock of Maelux SA, a Luxembourg corporation that owned the capital stock of MAE S.p.A., an Italian corporation. Penn Engineering & Manufacturing Corporation provided a guarantee to Pirito on behalf of Penn World (collectively, the Penn Entities).

Both Pirito and the Penn Entities alleged that the other side breached the SPA. The Penn Entities also claimed that Pirito's conduct leading up to the closing of the transaction constituted fraud. In 2005, the Penn Entities initiated an arbitration before the Chamber of National and International Arbitration of Milan (the Milan Chamber). In 2007, the arbitral tribunal upheld its jurisdiction, over challenges by Pirito, to resolve certain of the disputed matters, but the tribunal found it did not have the power to appoint an independent public accountant, an appointment that was sought by the Penn Entities. Accordingly, Penn World filed a petition in the Court of Milan in 2007 for the appointment of such an accountant. The Court of Milan did so. The accountant issued a report and Penn World requested that the arbitral tribunal consider the accountant's report. For reasons that remain disputed, the arbitral tribunal did not consider the report, leading Penn World to commence a second Milan Chamber arbitration in 2008. 

The second arbitral tribunal issued a partial award on jurisdiction in February 2009, finding that it did have jurisdiction over Penn World's claim. It issued a final award in September 2009, finding that the accountant's report was valid, final, and binding on the parties, and concluding that Pirito had to pay certain amounts to Penn World. Pirito appealed the second arbitral tribunal's awards in the Milan Court of Appeal.

In the meantime (before the second arbitral tribunal issued its final award), Pirito issued a claim in the district court, alleging that the Penn Entities breached their obligation under the SPA to sell certain property to Pirito. The Penn Entities filed several counterclaims, including fraud, breach of the SPA by Pirito, and enforcement of the determination of the public accountant.

The district court stayed the proceeding while the parties tried to reach a settlement. When settlement discussions failed, the parties filed a number of motions. Two of these motions were Penn World's petition to confirm the Milan Chamber arbitration award and Penn Entities' motion for partial summary judgment, which sought a determination that certain facts found in the accountant's expert report relied on in the award were to be taken as established, such that Pirito could not relitigate those facts. 

In December 2011, the district court granted Penn World's petition to confirm the arbitral award. However, Penn Entities' motion for summary judgment was denied because the report was not considered binding on the parties, and the award did not have "issue preclusive effect" because there was an appeal pending and "arbitral awards are not final judgments while appeals remain pending." See Pirito v Penn Eng'g World, No 09-2396 (E.D. Pa. December 22, 2011).

Subsequently, the Milan Court of Appeal rejected Pirito's appeals and confirmed the second arbitral tribunal's partial and final awards of February and September 2009. Although certain claims and counterclaims of the parties had not been submitted to arbitration, the district court still had to determine the effect of the Milan Court of Appeal's judgment confirming the second arbitral tribunal's awards.

Issue Preclusion
Penn World argued that the second arbitral tribunal's final award, and the confirmation of the award by the Milan Court of Appeal in 2013, addressed its claim that Pirito breached Section 2(d) of the SPA, and that the arbitration award had preclusive effect because it met the requirements for a foreign judgment under Hilton v. Guyot, 159 U.S. 113 (1895) and satisfied the requirements of collateral estoppel. 

The district court stated that, under Hilton, U.S. courts hold foreign money judgments "conclusive upon the merits tried in foreign court," so long as the judgment was "rendered by a competent court, having jurisdiction of the cause and of the parties, and upon due allegations and proofs, and opportunity to defend against them, and its proceedings are according to the course of a civilized jurisprudence, and are stated in a clear and formal record." Pirito, No. 09-2396 at 33–34. Further, under the Pennsylvania doctrine of collateral estoppel, parties may not relitigate facts or legal issues if: (1) the issue was identical to the one decided earlier, (2) the earlier action resulted in a final judgment on the merits, or (3) the party against whom issue preclusion is asserted is the same party or is in privity with a party to the earlier judgment and had a full and fair opportunity to litigate the issue in the prior action. See Pirito, No. 09-2396 at 34.

The district court noted it had held in its 2011 decision that it was not clear whether Hilton's jurisdictional prong was satisfied because there was a "well-reasoned" dissent to the second arbitral tribunal's partial award on jurisdiction and because "comity," which obliges courts to recognize foreign courts' judgments, "does not apply with the same force to arbitration proceedings." To be sure, the district court had also observed in 2011 that respect for the capacities of foreign tribunals and the need for predictability in the resolution of disputes "might counsel in favor of applying Hilton to arbitration decisions." See Pirito, No. 09-2396 at 35. However, in any event, in 2011 the district court did not need to resolve this issue because the 2009 award did not, at that time, constitute a final judgment.

Once the Milan Court of Appeal confirmed the award and rejected Pirito's challenges, Penn World unsurprisingly took the position that the district court's previous concerns about jurisdiction and finality for the purposes of collateral estoppel were now satisfied.

The district court readily agreed with Penn World that the ruling of the Milan Court of Appeal "fully satisfied and resolved" its concerns about jurisdiction. Further, since the arbitral award was now confirmed in a foreign judgment, comity obliged the district court to recognize this judgment. The remaining question for the purpose of collateral estoppel was finality, since Pirito has previously admitted that the Milan Chamber arbitrations satisfied the requirements of identity of issues and similarity of parties. If final, arbitration proceedings have collateral estoppel effect in Pennsylvania. Pirito argued, however, that the deadline to appeal the Milan Court of Appeal decision to the Italian Supreme Court was still pending, and it had not yet determined whether to file such an appeal. Given the uncertainty, the district court assumed that Pirito would in fact file a further appeal, and the court proceeded to analyze the finality question on that basis.

The relevant precedent for the district court was Shaffer v. Smith, 543 Pa. 526 (Pa. 1996), in which the Pennsylvania Supreme Court held that a judgment is final for collateral purposes "unless and until it is reversed on appeal." See Pirito, No. 09-2396 at 38. Penn World had argued in 2011 that under this precedent the arbitral awards should be given preclusive effect, but the district court had disagreed, noting that Shaffer referred to "judgments" and "state court judgments," and that it was not clear whether these terms included arbitral awards. However, with the confirmation judgment from the Milan Court of Appeal, this uncertainty became moot. Accordingly, unless and until the judgment of the Milan Court of Appeal is reversed on appeal, it is to be considered final for the purposes of collateral estoppel. This finding, the district court emphasized, was consistent with the policy behind collateral estoppel (i.e., protecting parties from multiple lawsuits, conserving judicial resources, and—by preventing inconsistent decisions—encouraging reliance on adjudication). Thus, the district court held that the judgment of the Milan Court of Appeal, which confirmed the 2009 Milan Chamber awards, was entitled to collateral estoppel effect. The court then proceeded to apply the awards to the litigation in the Eastern District of Pennsylvania.

This case is important to the international arbitration community for at least two reasons. The first is the reluctance of the district court to make a determination on the preclusive effect of an arbitral award until the award was confirmed by a court at the seat of the arbitration (the Milan Court of Appeal). The district court's decision leaves open the question whether an arbitral award that is not confirmed at the seat—if, for example, the award is not challenged and therefore not confirmed at the seat—would nonetheless be considered a judgment for purposes of collateral estoppel. The second is the district court's willingness to consider the judgment of the Milan Court of Appeal as "final," even though the district court assumed that the judgment was being appealed to the Italian Supreme Court—and, accordingly, would also have to assume that the Italian Supreme Court might set aside the arbitral award. Nowhere in its decision does the district court consider the implications of its decision to find "finality" in this context and provisions of Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In this case, the overriding respect for foreign court judgments ultimately led to support for the international arbitration process—but that is not necessarily a favorable development for international arbitration.

Keywords: ADR, litigation, issue preclusion, foreign arbitral awards, foreign judgments, collateral estoppel effect