Arbitration Between Exceed Int'l Ltd. v. DSL Corp.

In the matter of the Arbitration between EXCEED INT'L LIMITED, Applicant/Counter-Defendant, v. DSL CORPORATION, Respondent/Counter-Plaintiff, v. LIDA PIPE (VIETNAM) CO. LTD., Third Party Defendant.

CIVIL ACTION NO. H-13-2572

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

SIGNED: April 30, 2014

MEMORANDUM AND ORDER

Exceed International Limited ("Exceed") initiated this proceeding to confirm an arbitration award against DSL Corporation ("DSL").¹ Although Exceed did not commence this proceeding with an original complaint, DSL filed an "Answer" and asserted counterclaims against Exceed.² DSL also named Tianjin Lida Steel Pipe Group Co, Ltd. ("Lida Pipe") as a Third Party Defendant. Exceed and Lida Pipe eachhave filed motions to dismiss DSL's counterclaims and third-party complaint.³ Finally, DSL has filed a Motion to Stay Arbitration Confirmation Pending Discovery, to which numerous supplements and responses were filed.⁴

The motions are ripe for decision. Having considered the parties' submissions, all matters of record, and applicable legal authorities, the Court denies Exceed's application to confirm the award, dismisses without prejudice the counterclaims brought by DSL, and denies as moot DSL's request for a stay pending discovery.

I. BACKGROUND

Exceed is organized under the laws of New Zealand and has its principal place of business in Auckland, New Zealand. Exceed shares common ownership with Lida Pipe, a Chinese company. DSL is incorporated under the laws of Texas, with its principal place of business in Houston.

Exceed sells steel pipes and casing manufactured by Lida Pipe. Lida Pipe and DSL entered into eighteen sales contracts between July 2011 and October 2012. These contracts were signed on DSL's behalf by Sang S. Lee, DSL's President. Lee also signed several secondary contracts with Exceed, which provided for payment byDSL to Exceed for pipe manufactured by Lida Pipe.⁵ Four of these latter contracts between Exceed and DSL are at issue in this action (the "Secondary Contracts"), two of which were executed in January 2012, and two in March 2012.⁶ All four Secondary Contracts were written in both Chinese and English; each English paragraph was followed by a corresponding Chinese paragraph.

The Lee Declaration submitted by DSL describes the negotiation and formation of the Secondary Contracts. Lee states that, for DSL's eighteen initial contracts with Lida Pipe, all contract negotiations were conducted in English between Lee and Lida Pipe's president, Bill Hu. Lee further states that the issue of arbitration never came up in his negotiations with Lida Pipe. Lee Decl., at 2, ¶¶ 4-5. The initial contracts were prepared by DSL, were exclusively in English, and did not contain arbitration provisions. Id. at 2, ¶ 6.

Lee avers that, at an unspecified time, but apparently before any of the eighteen initial contracts were performed, he received a request from Hu, communicated in English through DSL's purchasing agent Hansol Metal, for DSL to enter into secondary agreements with Exceed, Lida Pipe's sister company. Hu explained that the secondary agreements would provide that DSL remit payment for the purchased pipe to Exceed's bank account in China. Lee states, "It was explained to me that this request was made in order for Lida Pipe to avoid taxes on its profits in Vietnam. I understood that the terms of our Original Contracts would remain . . . and that the . . . supplemental agreements would serve only to direct payment to Exceed." Id. at 2-3, ¶¶ 7-8. Lee further emphasized that all negotiations and discussions regarding the Secondary Contracts were conducted exclusively in English, that the issue of arbitration was never raised, and that he would have objected if it had been raised. Id. at 3, ¶ 9.

The Secondary Contracts contained several provisions that differed from the original contracts, including an arbitration provision in Paragraph 14. In each of the four Secondary Contracts, the English version of Paragraph 14 stated as follows:

Arbitration: All disputes arising in connection with this Sales Contract or the execution thereof shall be settled by way of amicable negotiation. In case no settlement can be reached, the case at issue shall then be submitted for arbitration to the China International Economic and Trade Arbitration Commission in accordance with the provisions of the said Commission. The award by the said Commission shall be deemed as final and binding upon both parties.

Secondary Contracts, at 3, ¶ 14. Before signing the Secondary Contracts on behalf of DSL, Lee struck through the English versions of the arbitration provision. Lee explained in his Declaration that DSL did not agree to arbitrate, and that he "would never have agreed to arbitration, especially not in China—a country with which DSL has no affiliation and whose language I do not speak or understand." Id. at 4, ¶ 13.⁷ Lee, however, did not strike through the Chinese version of Paragraph 14.

Exceed contends in this action that, because the Chinese version of Paragraph 14 remained in the written agreements, DSL is bound by the agreement to arbitrate. DSL counters that Lee's strike-through of the English version of Paragraph 14 evidences a clear intent that DSL not be bound by the arbitration provision.

Lee states that he received no objection from either Lida Pipe or Exceed to his modifications, and that the parties began performing pursuant to the modified terms. Id. at 5, ¶ 16. Exceed states that, after it had partially filled the orders, DSL demanded a substantial discount on the price in the contracts in June 2012, when the market price of pipe declined in Houston. When Exceed refused, Exceed alleges DSL canceled its orders and therefore breached the Secondary Contracts.

On September 25, 2012, Exceed initiated arbitration proceedings before the China International Economic and Trade Arbitration Commission ("CIETAC"), an arbitral body that sits in China, in accordance with the Chinese language version of Paragraph 14 in the Secondary Contracts. The CIETAC panel set a hearing for January 22, 2013. Exceed provides evidence that notices of the hearing, as well as Exceed's application and other preliminary matters, were sent to and received by DSL. Application to Confirm [Doc. # 1], at 3-4. DSL did not respond to any of CIETAC's communications and did not appear for the hearing. At the hearing, Exceed presented its case and supplemental evidence, which Exceed states was subsequently provided to DSL. On April 16, 2013, the panel issued an award in favor of Exceed, determining that DSL had breached the four contracts at issue, and awarding $683,851.95 in compensatory damages, as well as related fees and costs. Arbitral Award of CIETAC, dated Apr. 16, 2013, English version (Exh. D to Doc. # 1) ("Award"), at 12. DSL neither communicated with nor appeared before CIETAC or the arbitral panel concerning this dispute with Exceed.

On September 3, 2013, Exceed filed an Application to Confirm Arbitration Award [Doc. # 1] in this Court, seeking entry of an order confirming the panel's Award of April 16, 2013.

II. EXCEED'S APPLICATION TO CONFIRM ARBITRATION AWARD

A. The New York Convention and Article V Defenses to Confirmation

The parties agree that the Award in this case is governed by the United Nations' Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the "New York Convention" or the "Convention").⁸ The New York Convention is enforced in United States courts pursuant to its implementing legislation, Chapter 2 of the Federal Arbitration Act ("FAA"). 9 U.S.C. § 201 (the New York Convention "shall be enforced in United States courts in accordance with this chapter"); see Karaha Bodas Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 288 (5th Cir. 2004).⁹ The statute permits a party to arbitration to apply to the federal courts for "an order confirming the award as against any other party to the arbitration," and contains mandatory enforcement language: "The court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention." 9 U.S.C. § 207 (emphasis added).

The defenses referenced in the statute are listed in Article V of theConvention.¹⁰ Courts in the United States have held consistently that the Convention's Article V defenses are enumerated and narrowly construed, so as to encourage enforcement of arbitral awards in international commercial contracts. Gulf Petro Trading Co., Inc. v. Nigerian Nat'l Petroleum Corp., 512 F.3d 742, 747 (5th Cir. 2008); Karaha Bodas, 364 F.3d at 288. See China Minmetals Materials Import and Export Co, Ltd. v. Chi Mei Corp., 334 F.3d 274, 283 (3d Cir. 2003) ("Consistently with the policy favoring enforcement of foreign arbitration awards, courts strictly have limited defenses to enforcement to the defenses set forth in Article V of the Convention, and generally have construed these exceptions narrowly").

In this case, Exceed argues that the mandatory language of Section 207 requires confirmation of the Award. DSL asserts that the parties never entered into a valid agreement to arbitrate their dispute, and invokes multiple defenses, including several under Article V of the New York Convention.¹¹

The Court holds that, under Article V, confirmation of the Award in this case should be refused. This conclusion requires several analytical steps. As discussed below, the Court concludes that: Article V(2) of the Convention includes a defense against confirmation when the parties did not enter into a valid agreement to arbitrate, see infra Section II.B; this Court, and not CIETAC, is empowered to decide whether the parties' agreement to arbitrate is valid, see infra Section II.C; and, the parties did not reach agreement to arbitrate, see infra Section II.D.

B. Whether the Absence of a Valid Agreement to Arbitrate Is a Defense Under ...