Pre-Litigation Planning in Multinational Cases:

How to Help Insure that a U.S. Judgment will be Enforceable Overseas

by James O. Ehinger

If you are a typical Arizona practitioner, you probably glanced at the title of this article and said to yourself, "I’ve never been involved in multinational litigation, and, with any luck, never will be." If you are like myself, you then turned the page in search of a good war story or lawyer joke. However, regardless of how forbidding it may sound, international litigation is becoming increasingly commonplace in Arizona. In fact, you may already be involved in a multinational case and not know it.

You need not be doing anything so exotic as arguing a case to the World Court in the Hague or presenting an arbitration to the I.C.C. in Paris to be involved in international litigation. Any time you handle a lawsuit in which the judgment you obtain may subsequently need to be enforced by another nation’s courts, or collected out of assets located overseas, you are involved in a multinational case. The most obvious situations in which this occurs are cases involving a foreign national as a party — either as the defendant from whom damages are sought, or as a plaintiff who may become liable for your client’s costs or fees. As Arizona’s foreign trade proliferates, and foreign investors increase their holdings in Arizona businesses and properties, the incidence of such cases has also increased. Less obvious, but no less problematic, are cases in which the bulk of your opponent’s assets are located abroad, and the increasing popularity of foreign situs trusts as estate planning and asset protection devices among high income Americans has made this a significant concern in even purely "local" lawsuits.

In any such case, the judgment you finally obtain for your client after skillful and arduous litigation may prove to be worthless unless it can be enforced against assets held by your opponent in a foreign country. Because of the enormous disparities in the willingness of different nations to recognize and enforce U.S. judgments, as well as in the procedures followed in reaching that determination, there is no universal rule that will ensure that your judgment will be enforceable in every country to which you might wish to export it. Some nations, such as Sweden, Norway and much of the Caribbean, still do not recognize other nation’s judgments at all (absent a specific treaty), and will require a case to be retried on the merits in their local courts. At the other extreme, some countries, most notably France, are extremely liberal in their acceptance of foreign court awards, and will even recognize and enforce other countries’ interim court orders.

Despite these differences, however, there are a number of common pitfalls that will be encountered in any multinational case, and avoiding these potential traps can substantially increase the likelihood of collecting your U.S. judgment overseas. Moreover, even when enforcement will be impossible because of substantive legal obstacles, a proper pre-litigation inquiry will at least allow your client to make an informed decision whether to take the risk that the opponent’s U.S. assets will be sufficient to satisfy the claim, or to seek alternative relief, such as by arbitration or an action in the defendant’s home country.

General Considerations

In the United States, recognition and enforcement of foreign-country judgments is governed largely by the provisions of the Uniform Foreign Money-Judgments Recognition Act and the Restatement (Third) Foreign Relations Law. The substantive provisions of both authorities are substantially identical, and they require a court to weigh a variety of factors relating to due process, jurisdiction, court procedure and public policy in order to determine when and if an award made by another nation’s court will be granted binding force in the U.S. Ostensibly, most foreign countries require their courts to engage in the same type of analysis, and many even employ the same terminology. The surface similarities may be deceptive, however, and, as discussed below, other countries will generally give more weight to different aspects of the formula then would a U.S. court, and will make their analysis in the context of a very different conceptual framework. Thus, it is not unusual that countries which appear to have substantially identical rules of law concerning the enforcement of other country’s judgments will reach radically different results in the practical application of those rules.

There are also a number of more subtle philosophical differences between U.S. and foreign judicial systems which can trip the unwary practitioner. For example, under U.S. law, once a judgment is found to be entitled to recognition, it is treated the same as a domestic judgment for all purposes, including enforceability, execution and its res judicata effect. In many foreign countries, however, recognition and enforcement are distinct and separate concepts. Thus, while a country may offer a simple, expedited procedure for recognition of a judgment for res judicata or evidentiary purposes, much lengthier and more exacting proceedings may be required before the judgment can be executed upon.

The United States also has a long-standing hostility toward international agreements for recognition and enforcement of foreign judgments, and the United States is not a party to any treaty or international convention on this subject. This reluctance is not shared by our allies, and most of our principal trading partners have executed treaties among themselves which allow for relatively easy and prompt recognition of one another’s court decrees.¹ These treaties generally require the signatory countries to give "full faith and credit" to each other’s court proceedings, and allow for summary registration procedures very similar to those of the U.S. "Sister States" Judgment Act. These multilateral treaties can provide an additional avenue of enforcement overseas that is not available in the United States, and it is sometime possible to side-step a foreign country’s hostility to direct enforcement by first domesticating the U.S. judgment in a third country which has a reciprocal recognition treaty with the actual target jurisdiction.

Just as a U.S. court will deny recognition to a foreign-country judgment founded upon a claim that is "repugnant" to U.S. law, most foreign countries will refuse to enforce a U.S. judgment that would violate local public policy. While it is impossible to list all of the types of U.S. legal claims that have been found to violate other nations’ public policies, this issue most frequently arises in the context of "excess" damage awards. Most other countries do not share the American penchant for non-compensatory damages, and will disallow awards of punitive damages, or "multiple" damages, such as treble RICO damage awards. Great Britain has gone a step further, and will deny recognition entirely to any judgment that contains a multiplied damage award — rather than just refusing to enforce the "excess" portion.²

Finally, many countries will decline to enforce a foreign judgment unless the jurisdiction that rendered the judgment would itself recognize and enforce the foreign country’s decrees. While most U.S. states have abolished reciprocity as a condition to recognition of a foreign country judgment, this issue is still an open question in Arizona. Thus, if your opponent resides in a country which requires the foreign judgment-holder to affirmatively demonstrate that the issuing jurisdiction would grant reciprocal recognition to that country’s judgments, you may be well advised to file suit in a state which clearly grants reciprocal enforcement rights — or seek to have the case arbitrated, since reciprocity is not an obstacle to enforcement of arbitration awards.

Service of Process

U.S. courts are not overly concerned with the technicalities of service of process, and a U.S. Court will consider due process satisfied if service was made in accordance with the foreign country’s ordinary procedures, and in a manner sufficient to inform the defendant of the nature of the proceedings against him, and allow a timely opportunity to participate therein. The opposite is true in most foreign countries, however, and foreign courts will generally decline to recognize or enforce a judgment entered against one of its citizens unless process was served strictly in accordance with that country’s laws.

Contrary to the trend in the United States towards constructive service, most foreign countries still require direct, personal service upon a defendant. These countries generally will not recognize the validity of an action in which service is made either by mail or publication, even if the defendant was residing in a country which permitted such service at the time suit was filed. Switzerland goes even further, and considers any form of service of process by mail not only improper, but illegal.³ Thus, a U.S. litigant attempting to enforce a judgment obtained against a Swiss citizen after service by mail will not only have his judgment rejected by the Swiss court, but may also find himself subject to criminal prosecution for illegal process.

Similarly, although the United States is a signatory to the Hague Convention on International Service of Process, our courts have held that the use of its procedures are optional, and that process in a multinational case may be served in accordance with the Hague Convention, the Federal Rules of Civil Procedure, or any other generally recognized method of service. The Federal Republic of Germany, on the other hand, considers the use of the Hague Convention procedures mandatory, and will generally refuse to recognize a judgment entered in another signatory country founded upon service made by any other method.

While these obstacles may be daunting, they are by no means insurmountable. Because of the procedural flexibility allowed in most American courts, it is generally a simple matter to employ a method of service that will be compatible with the law of the defendant’s home country. When in doubt, a litigant can simply employ both the appropriate U.S. service procedure and the procedure required by foreign law. However, the need to comply with the procedural requirements of a foreign country can often try the patience of the most determined litigant.

One service regime which has proved particularly vexing to U.S. claimants is that of our southern neighbor. Mexico has a somewhat unique "judicial-service" procedure which is considered to be one of its citizens’ fundamental constitutional rights.⁴ Thus, Mexico will refuse to recognize the validity of litigation instituted against one of its citizens by any other process. Unfortunately, a request for Mexico’s assistance in making service of a U.S. complaint must follow a lengthy and tortuous path.

The procedure begins with submission of the U.S. complaint by means of a letter rogatory to the Ministry of Foreign Relations, accompanied by Spanish translations of all relevant documents, requesting that the appropriate Mexican court effect service. The Ministry will make its own independent determination as to whether the U.S. plaintiff should be permitted to pursue its claim before deciding whether to refer the matter to the appropriate court. Because of the need for both executive and judicial review of the request, it is not unusual for the entire procedure to take as long as two years before the complaint is finally served upon the Mexican defendant. However, a litigant who is unwilling to endure these judicial-service requirements will only guarantee that the judgment obtained in the U.S. litigation will subsequently be unenforceable in Mexico.

Default Judgments

Default judgments present a special problem, because, unlike the United States, many foreign countries will not recognize or enforce judgments entered by default. This is not the result of any hostility toward the U.S. judicial system itself, but rather a difference in legal philosophy regarding defaults. Thus, while many countries decline to enforce default judgments, they reach that result for a variety of different reasons.

For example, under Belgian law, a court is required to make an independent examination of the lawsuit’s merits when the defendant fails to appear, and Belgium will not recognize a judgment based upon a legal presumption of the truth of the complaint’s allegations, as occurs with entry of a U.S. default judgment.⁵ Similarly, France generally considers its courts to have exclusive jurisdiction over disputes involving its citizens, but deems this privilege waived by voluntary participation in a foreign lawsuit.⁶

The obstacle most commonly encountered by U.S. litigants seeking to enforce a default judgment, however, is the traditional English doctrine enunciated in Emanuel v. Symon [1908] 1 K.B. 302 (C.A.), that the mere opportunity to appear and defend is insufficient to confer jurisdiction upon a court. These countries require instead that the defendant "submit" to the court’s jurisdiction, by either appearing in the action, or by having contractually agreed to accede to that country’s jurisdiction. The fact that a contract contains a choice-of-law provision is not enough to constitute submission to the jurisdiction of the country whose law governs the transaction. Rather, the defendant must have expressly agreed to be bound by the decisions of that nation’s courts. This Doctrine of Submission is still widely followed throughout the world, and has only recently begun to be eased within the British Commonwealth itself.⁷

This doctrine had been a particular problem for U.S. litigants because, until recently, Canada had adhered to one of the strictest versions of the doctrine, and its courts had generally declined to recognize default judgments entered in other Canadian provinces, as well as those of other nations. This traditional rule was altered by the Canadian Supreme Court’s 1990 decision in Morguard Investments Ltd. v. De Savoye [1990] 3 S.C.R. 1077, 76 D.L.R. (4th) 256, in which British Columbia had allowed enforcement of a default judgment for a deficiency obtained by an Alberta bank following foreclosure of Alberta property given a security by a then-resident of Alberta who had subsequently moved to British Columbia. The Canadian Supreme Court held that such recognition of a "foreign" default did not violate the defendant’s fundamental rights if the subject matter of the litigation had a "real and substantial connection" to the jurisdiction in which judgment was rendered, even without submission. This ruling was broadened to encompass foreign-country judgments in 1993.⁸ It must be noted, however, that the Canadian Supreme Court’s ruling was entirely permissive, and allowed, but did not require, the provincial courts to recognize "foreign" default judgments. To date, none of Canada’s other provincial courts have yet followed British Columbia’s lead.⁹

Subject Matter Jurisdiction

While the UFMJRA and Reinstatement include subject matter jurisdiction among the factors to be weighed by a U.S. court in determining whether to recognize a foreign country judgment, it represents the least important of those factors, and it is practically unheard of for a U.S. court to deny recognition to an alien judgment on this ground. This is not the case overseas, however, and lack of subject matter jurisdiction represents one of the most common grounds for rejection of U.S. judgments by foreign courts. While this issue generally arises in situations where the U.S. Court is held to have infringed another country’s exclusive jurisdiction, it can also arise when the U.S. court has acted in a matter that the foreign nation considers non-justiciable.

This problem arises most often with regard to lawsuits involving claims to real property. Most other nations follow what is known as the Doctrine of Exclusive Real Jurisdiction, and hold their own courts to have the exclusive authority to make binding judgments concerning rights to real property situated within their borders. The Doctrine of Exclusive Real Jurisdiction is followed throughout much of the world, and is not limited to countries with a particular legal or cultural tradition. For example, countries as culturally and historically diverse as Canada, Argentina and Japan all follow this doctrine, and require any dispute involving real estate located within their borders to be settled by their local courts, even if none of the litigants are citizens or residents of that country.¹⁰

In addition to disputes involving real property, many countries also consider their courts to have exclusive jurisdiction with regard to the probate of estates of persons who died while domiciled there, as well as exclusive authority regarding questions concerning that country’s patents, trademarks or copyrights. Spain has expanded the doctrine of exclusive real jurisdiction to encompass exclusive authority over all personal property located in the country at the time the lawsuit is filed.¹¹ Thus, before incurring the expense of litigating an action in the United States against a foreign defendant, it is important to first make sure that you are not engaging in a futile exercise, and that the defendant’s home country will recognize your court’s jurisdiction to even address the issues involved.

While national laws hostile to the enforcement of foreign judgments have generally been disappearing throughout the world, there has been a significant counter-trend among jurisdictions which act as "asset havens," and the increasing prevalence of foreign situs trusts makes the question of exclusive foreign jurisdiction one of critical importance to even purely local practitioners. Most "asset haven" countries consider their courts to have exclusive jurisdiction over any trust created under their laws, and will not recognize another country’s decree which purports to invalidate such a trust, or which declares its funding or creation to have been a fraudulent conveyance. Some of these jurisdictions, such as Belize, Nevis and Niue, expressly prohibit recognition of foreign country judgments. However, even those which technically allow enforcement of foreign decrees often have restrictive laws regarding fraudulent conveyances, or extremely short statutes of limitations, that may effectively bar a creditor from collecting his or her U.S. judgment.

The recent Orange Grove case in the Cook Islands provides a sobering example of the obstacles that a claimant can face. The claimants were investors who had purchased condominiums in 1988 from the Orange Grove Partners, and, in April, 1994, obtained a $5.7 million judgment in California against the company and its owners. They discovered that the individual defendants had established Cook Islands trusts soon after being served with the lawsuit, and had transferred their assets into those trusts shortly before trial. The Cook Islands International Trust Act provides that no conveyance into a trust shall be deemed fraudulent unless it was made within two years after the creditor’s claim accrued, and the creditor brings suit within one year to set aside the transfer. Although the investors filed suit within the one-year deadline, the case was dismissed because the conveyances in 1994 had occurred more than two years after their claims had accrued (i.e., on the dates of the underlying sales). The Cook Islands Court of Appeals attempted to sidestep the statute by holding that entry of the U.S. judgment gave rise to a new cause of action, thereby creating a "second two-year window" within which suit could be brought. Unfortunately, this victory will not benefit subsequent litigants, as shortly thereafter the Cook Islands Legislature amended the Trust Act to expressly close this "second window."¹²

Thus, whenever you are engaged in litigation against an individual who owns sufficient assets to justify the cost of establishing an offshore trust, you should be aware of the potential need for eventual enforcement of your judgment in a foreign country. Although early discovery into a defendant’s finances is generally not permitted, the potentially devastating effect such a transfer could have on the claimant’s ability to enforce the judgment should justify an exception for the limited purpose of inquiring as to whether the defendant has established, or moved assets into, a foreign situs trust. Your opponent may not answer truthfully, but even those jurisdictions that decline to enforce foreign judgments, or that have short statutes of limitations, generally allow limitations to be tolled for fraudulent concealment of a claim. Thus, even a false answer to such a discovery request may still provide the opportunity to prosecute a subsequent fraudulent conveyance action in the jurisdiction where the assets are located.

At the opposite end of the spectrum of judicial authority, a U.S. judgment-holder may find his collection efforts frustrated not by the expansiveness of the jurisdiction claimed by the foreign court, but rather by that court’s lack of authority. For example, many countries consider labor and employment disputes to be matters exclusively reserved for the executive branch of government. Similarly, tax disputes, child custody and support, and a variety of business regulations are often considered the exclusive bailiwick of the administrative agency charged with their enforcement. Thus, if the U.S. case involved claims which would not have been considered justiciable in the defendant’s home country, that nation’s courts will generally refuse to accept a U.S. court’s determination on those subjects.

Enforcement Procedures

An alien litigant seeking to enforce a foreign-country judgment in the United States will encounter two very different types of enforcement procedures, depending upon the state in which enforcement is sought: the expeditious registration procedures of the UFMJRA, or the more difficult and time-consuming process of prosecuting an independent civil action on the judgment. A U.S. litigant who attempts to export a local judgment abroad will face a very similar dichotomy. Some countries, and particularly those with a civil law tradition, provide a relatively simple, summary procedure for determining the enforceability of foreign judgments known as the "exequatur." In other countries, and especially those with a common law tradition, the U.S. judgment-holder will be required to bring a separate action on the judgment, or a common law action for debt. Most countries also impose an "ultimate" statute of limitations which will bar any proceedings to collect the U.S. judgment a specified number of years after it was rendered, regardless of whether the judgment might still be enforceable or renewable in the United States.

In addition to these court proceedings, some countries impose a further layer of review in the form of an administrative screening procedure. For example, in Mexico, a U.S. judgment must first be presented to the Ministry of Foreign Relations by means of an appropriate letter rogatory.¹³ The Ministry is endowed with independent authority to determine the validity of the U.S. judgment, and may refuse to act on the letter rogatory if it decides that the decree would be unenforceable under Mexican law. If the Ministry determines that the judgment is potentially enforceable, and that all necessary documents have been properly submitted, it will also determine which court within the Mexican judicial system should properly hear the matter, and forward the paperwork to that court for further proceedings. However, the fact that the judgment has passed muster before the Ministry does not imbue it with any presumption of validity, and the court will make a de novo evaluation of its enforceability.

Conclusion

While the potential obstacles to enforcement of a U.S. judgment abroad can be substantial, with proper pre-litigation planning, a U.S. claimant can be relatively certain that he has taken the appropriate steps to ensure that a judgment he obtains against a foreign defendant (or against a U.S. defendant who holds assets overseas) will be enforceable in an alien jurisdiction. As in most endeavours, the most important rule to remember is, "look before you leap." Every country has its own unique and idiosyncratic rules and procedures, so you must be sure to investigate the law of the particular country implicated by your lawsuit before making a faux pas that might prove fatal to your later enforcement efforts.

James O. Ehinger is of counsel with the law firm of Jennings, Strouss and Salmon, and he specializes in commercial litigation and international law. The author would like to gratefully thank and acknowledge Dr. Nicolas R. Zullo of Nicolas Zullo y Asociados in Buenos Aires, Argentina, and James A. D’Andrea of Bennett Jones Verchere in Calgary, Alberta, Canada for their assistance in the writing of this article.

ENDNOTES:

1. Most European countries are signatories of the Brussels Convention on Jurisdiction and Enforcement of Judgments in civil and commercial matters, promulgated September 27, 1968, and the supplemental Lugano Convention on Jurisdiction and Enforcement of Judgments in civil and commercial matters, promulgated September 16, 1988. Similarly, most Latin American countries are signatories of either or both the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, promulgated May 8, 1979 at Montevideo, Uruguay, and the Inter-American Convention on Jurisdiction in the International Sphere for Extraterritorial Validity of Foreign Judgments, promulgated on May 24, 1984, in La Paz, Bolivia.

2. Protection of Trading Interests Act of 1980, § 5.

3. Criminal Code of Switzerland, Art. 271.

4. Constitucion Politica de los Estados Politicos Mexicanos, 103a edicion, Chapters IV and V.

5. Judgment of December 16, 1987, Court of Appeals, Mons (1988) Jurisprudense de Liege, Mons et Bruxelles, 321

6. French Civil Code, Articles XIV and XV.

7. This doctrine was codified in England in the Civil Jurisdiction and Judgments Act of 1982, § 33. Also see Hong Kong, Foreign Judgments (Restrictions on Recognition and Enforcement) Ordinance, § 4; Israel, Foreign Judgments Enforcement Act, 5718-1958, § 6(3); Australia, Sykes & Pryles Australian Private International Law (3rd ed. 1991), p. 116.

8. AmChem Products, Inc. v. British Columbia (Worker’s Compensation Board) [1993] S.C.R. 897, 102 D.L.R. (4th) 96, upholding British Columbia’s enforcement of a default judgment entered in Texas.

9. Many Canadian provinces have entered into reciprocal enforcement agreements with individual U.S. states, but Arizona is not a party to any of those agreements.

10. See Argentina, III Codigo Procesal Civil y Comercial de la Nacion, Art. 10; Japan, Chimura v. Kasamatsu 8 (6) Minroku 85 (Great Court of Cassation, June 17, 1902).

11. Spanish Civil Procedures Act, Art. 22.

12. 515 South Orange Grove Owners, et al. v. Orange Grove Partners, Plaint No. 208/94, High Court of the Cook Islands (Civ.Div.) (CA 1/95 and CA 31/96). Cook Islands International Trust Act §13(B)(3) and (4). However, the amended Act now provides that its protections are inapplicable if the conveyance occurs after the creditor has filed suit.

13. Mexican Federal Code of Civil Procedure, Art. 571(1); Code of Civil Procedure for the Federal District of Mexico, Art. 606(I).