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Seizing the moment: Obtaining security in an arbitration.

Summary: Arbitration clauses are virtually everywhere. They can be found in oil and gas leases, construction contracts, vessel charters, employment agreements, supply contracts or purchase agreements.

Multiple ...

Arbitration clauses are virtually everywhere. They can be found in oil and gas leases, construction contracts, vessel charters, employment agreements, supply contracts or purchase agreements.

Multiple organizations administer arbitrations and provide rules that govern the arbitration proceedings. Regardless of the nature of the dispute, the type of contract or the governing arbitration clause, arbitration presents a significant expense and risk for the party, particularly for the claimant. Often, an unforeseen risk may be the adverse party's ability to pay the final award.

Imagine the following scenario: After a contentious and hard-fought arbitration, you successfully obtain an award against the adverse party. They refuse to pay. You start a confirmation proceeding to convert the arbitration award into a judgment.

Once again, you prevail and now have a judicially enforceable judgment. They still fail to pay you. An enforcement action ensues. You then learn why your award remains unsatisfied: The adverse party has no money or assets that you may seize to satisfy the award. Your arbitration award is worth about as much as the paper it is printed on.

To avoid nonpayment of an arbitration award, arbitration claimants should consider pursuing a judicial proceeding to obtain security to protect a judgment against an adverse party. In certain circumstances, a claimant may obtain security either pre-award or prior to a confirmation proceeding.

The Federal Arbitration Act is the legislative framework that governs the enforcement of arbitration agreements and arbitration awards. While this law is broadly interpreted, it generally does not provide for pre-award or pre-confirmation security except in narrow instances under federal maritime jurisdiction. Whether a state arbitration statute may expressly provide for security in aid of an arbitration varies by jurisdiction.

Under both the Federal Arbitration Act and state law, available means of obtaining security may include traditional common law remedies, such as a temporary restraining order, a preliminary injunction or attachment. These provisional remedies are based in a court's inherent equitable powers.

Although different in application, all of these traditional "provisional remedies" seek to preserve the status quo or prevent the diminishment or removal of an asset. Claimants can use these tools to ensure that an asset is available to satisfy an arbitration award in the absence of cash. Scenarios in which a court may grant security or injunctive relief could include:

Evidence of the dire financial condition of the opposing party.

An asset that is readily transportable or easily sold.

A risk that the subject matter of the arbitration is subject to waste.

A claimant may seek injunctive relief either pre-arbitration in connection with an action to enforce an arbitration agreement, or post-arbitration in connection with a proceeding to confirm an arbitration award. Because injunctive relief deprives or restricts a party of property rights, the courts consider injunctive relief an "extraordinary remedy." Although specific factors may vary by jurisdiction, the ability to obtain a temporary restraining order or an injunction commonly require proof of the following: a substantial likelihood of success on the merits; a substantial threat that a claimant will suffer irreparable harm if the injunction is not granted; the threatened injury outweighs any damage the injunction might cause the defendant; and the injunction will not disserve the public interest. Evidence to support a claim for injunctive relief typically requires relevant documents, affidavits and often live testimony.

Factors to consider

Before seeking security in aid of an arbitration, claimants should take into account all relevant factors. The timing of the proceeding and viability of a claim are key considerations. Seeking security before an arbitration begins may increase chances for success; otherwise, the court may defer the issue of security to the arbitration panel.

An early attempt to obtain security is particularly important if a claimant has any concern that the adverse party may move an asset outside the jurisdiction, or if any asset may be wasted, diminished or otherwise impaired. Another important factor is whether sufficient evidence exists to support the need for court intervention, since courts consider injunctive relief an extraordinary remedy.

Choice of law and venue are additional considerations. For substantive disputes, the parties to an arbitration agreement will be bound to the law set forth in their agreement.

An action for security is considered an ancillary proceeding. As such, the law applicable to an action for security is often the law of the state in which the security action is filed, and not necessarily the law set forth in the parties' contract.

Assuming they can meet jurisdictional thresholds, claimants should consider the benefits (and potential negatives) of seeking security in aid of arbitration in federal court as opposed to state court. Some benefits of federal courts may include simplified service of process, efficient federal procedural tools and an overwhelming presumption in favor of enforcing arbitration agreements and the confirmation of arbitration awards.

Some practitioners believe that the federal courts are a more efficient venue to resolve disputes relating to arbitration, since parties regularly file Federal Arbitration Act proceedings in federal court.

There is a growing trend among state and particularly federal courts to entertain requests for injunctive relief in connection with an arbitration. Federal courts have shown a willingness to apply traditional injunctive relief standards to requests for pre-arbitration security and in post-award confirmation proceedings.

Although obtaining security in aid of arbitration is not a certainty, claimants should certainly consider whether obtaining security is viable either before serving the arbitration demand or in conjunction with a confirmation proceeding.

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Publication:Inside Counsel
Date:Jul 11, 2016
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