First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we cover the US District Court for the Southern District of New York's (SDNY) August 5, 2022 decision to deny the Republic of Guatemala’s (Guatemala) motion for entry of an approximately $1.8 million default judgment against IC Power Asia Development Ltd (ICPA), an Israeli company, with respect to enforcement of an arbitral award, due to improper service of process. See Republic of Guatemala v. IC Power Asia Dev. Ltd., 1:22-CV-00394 (CM), 2022 WL 3139949 (S.D.N.Y. Aug. 5, 2022). Notwithstanding the fact that the court found it had subject matter jurisdiction and personal jurisdiction, the court found "no reason" to excuse Guatemala's deficient service. The defendant has not appeared in the case; thus, the court conducted its own examination of the record. The court gave Guatemala an additional 30 days to properly serve ICPA pursuant to the requirements under N.Y. Bus. Corp. Law § 307. This case contains a thorough discussion of the jurisdictional bases on which enforcement of an arbitral award can be sought and is illustrative of the need for exacting compliance with service requirements, especially when the defendant has not appeared and entry of default is sought.
ICPA filed an arbitration demand against Guatemala challenging certain actions taken by Guatemala pursuant to the Guatemala-Israel Bilateral Investment Treaty. Id. at 6. The arbitration was held in the UK. Id. The panel's award rejected ICPA’s claims, found for Guatemala and directed ICPA to pay approximately $1.8 million in arbitration and legal costs (the Award). Id.
Guatemala filed a petition in the SDNY to recognize the $1.8 million Award plus pre-judgment and post-judgment interest. Id. at 7. Guatemala served a copy of the petition on the Secretary of State of New York and mailed a copy with notice to ICPA's last known address. Id. Guatemala did not file an affidavit of service with the court, as required under New York law, until filing its motion for default. Id. Guatemala also served relevant documents on an executive of IC Power. Id. The defendant did not appear.
The court acknowledged that the Second Circuit views "a default judgment [as] the most severe sanction which the court may apply." Id. at 8 (citations omitted). Therefore, when jurisdictional questions arise, "the court must resolve 'doubt…in favor of the defaulting party.'" Id.
IC Power, incorporated in Singapore, is the parent holding company of defendant ICPA. ICPA wanted to expand its investment in the Latin American energy distribution market. Id. at 3. The CEO of ICPA and IC Power contacted Citigroup New York (Citi), the financial advisor to Actis LLP, a UK based investment fund, regarding Actis' sale of two electricity distribution companies located in Guatemala. Id. ICPA acquired the Guatemalan electricity companies and the transaction closed in New York. Id. at 4. The acquisition occurred through a stock purchase agreement, which was governed by New York law and included an arbitration clause that identified New York as the seat of the arbitration. Id. ICPA subsequently sold its Guatemalan assets in the electricity distribution companies to a private equity fund in New York. Id. at 5. The sale was "governed by New York law and had a New York exclusive forum selection clause." Id.
First, the court analyzed whether it had subject matter jurisdiction to enter the default judgment. Under the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958 (the New York Convention), and the Federal Arbitration Act (the FAA), "district courts in the United States…have original jurisdiction over" any "action or proceeding falling under the [New York] Convention." 9 U.S.C. § 203. The New York Convention is triggered when "an arbitration involves at least one foreign party" and the arbitral award derives from a commercial relationship. Order at 9 (quoting 9 U.S.C. §202). The court determined that it did have subject matter jurisdiction because Guatemala and ICPA are foreign parties and the Award arose out of a "commercial" legal relationship. Id. at 10. Specifically, the court reiterated the Award, which stated that ICPA's "investment in the energy distribution market of Guatemala through the purchase of two Guatemalan companies"  was a commercial transaction, and because the arbitrators themselves described the dispute as commercial in character…" Id. (citations omitted).
Second, the court looked to whether it had personal jurisdiction—either general or specific—and concluded that although the requirements for personal jurisdiction were satisfied, the court did not have personal jurisdiction to enter the default judgment due to improper service. Additionally, the court held that it did not have general jurisdiction over ICPA because ICPA engaged in a "one-time deal" in New York (i.e. the acquisition of the Guatemalan electric distribution companies), which the court determined was not adequate to meet the requirement of "continuous and systematic" contact such that the defendant is considered "at home" in New York. Id. at 11 (citations omitted).
While the court did not have general jurisdiction over ICPA, the court concluded it did have specific jurisdiction over the defendant. "A court may exercise specific personal jurisdiction over a foreign corporation where: (i) 'it has a statutory basis for such jurisdiction under New York's long-arm statute,' and (ii) the exercise of such jurisdiction is consistent with due process." Id. at 11 (citations omitted). Under New York law, a court has personal jurisdiction over a defendant where the defendant conducts business within the state and the claim arises from the business activity. Id. at 12. New York courts have determined that a single transaction is sufficient to establish personal jurisdiction. Id. Here, the SDNY concluded the defendant had sufficient contacts with New York. Id.
However, in order for the SDNY to exercise jurisdiction over a defendant, "the procedural requirement of service of summons must be satisfied." Id. at 14 (citations omitted). Proper service of summons where plaintiff seeks entry of a default judgment is "highly important" and if there is not proper service, "the court is ‘without power to issue a judgment against'" the defendant. Id.
The court found that Guatemala failed properly to serve ICPA. Under New York law, proper service requires that (1) Guatemala "personally deliver" the required documents to the New York Secretary of State, (2) send copies of the relevant documents to ICPA via "registered mail with return receipt requested"; and (3) "file with the clerk of the court" the "proof of service…by affidavit of compliance with this section…, together with the process, within thirty days after receipt of the return receipt signed by the foreign corporation, or other official proof of delivery or of the original envelope mailed." Id. at 17 (citing N.Y.B.S.C § 307(b),(c)). Guatemala only served the New York Secretary of State. Guatemala did not file proof of service within the time required under the statute, and it was unclear to the court whether Guatemala searched for ICPA's address before mailing service of process to ICPA's last known address. Id.
Additionally, ICPA's service of an IC Power executive, rather than an ICPA executive, did not constitute proper service because service of process on a parent company does not constitute service on the subsidiary. Id. The court rejected ICPA’s argument that an agency relationship exists between ICPA and IC Power and therefore service on IC Power constituted service on ICPA. Although ICPA and IC Power are treated interchangeably in certain business documents and in the Award, the record suggests IC Power is a corporate affiliate of ICPA, and not an agent of ICPA. Id. at 5, 14-15. IC Power is not an agent of ICPA because IC Power does not “perform services on behalf of ICPA in New York…[or] conduct any activities of importance to ICPA.” Id. at 15. Guatemala did not meet its burden to demonstrate that "IC Power, the Singaporean parent corporation of an Israeli subsidiary corporation, has acted as the 'New York representative' for ICPA or has performed any business of ICPA in New York….The fact that IC Power does business in New York and trades on the NYSE does not establish the necessary agency relationship between it and its Israeli subsidiary. And since the Award is against ICPA – not IC Power – the fact that IC Power may be subject to personal jurisdiction in New York is irrelevant." Id.
Consistent with precedent in the SDNY, the court concluded that although the court had personal jurisdiction over the defendant and Guatemala served the New York Secretary of State, Guatemala must meet the other service requirements required under New York law. Moreover, "given the severity of the proposed consequences for ICPA—entry of a default judgment—the Court finds no reason to excuse the deficiencies in service." Id. at 18. The court denied Guatemala's motion for default and granted Guatemala an additional 30 days to properly serve ICPA in accordance with New York law.
Notably, the SDNY did not address whether substituted service on the New York Secretary of State enables plaintiff to avoid service requirements under the Hague Service Convention. New York law, like the law of many states, allows for service on the New York Secretary of State where the defendant foreign entity does business in New York but is not registered in the state. See N.Y. Bus. Corp. Law § 307. However, under the Hague Service Convention, the Convention applies "where there is occasion to transmit a judicial or extrajudicial document for service abroad." Hague Service Convention Art. I. Because service is not complete under Section 307 absent the mailing of a copy of the summons and complaint abroad, there is an argument that the mailing—even if local law denominates it "notice" rather than service—triggers the application of the Convention, which is mandatory when it applies. On May 18, 2022, the US District Court for the Southern District of Texas Houston Division held that proper substituted service on a State Secretary of State requires that plaintiffs follow the Hague Service Convention because service is not complete absent transmission of the mailed copy abroad. See Topstone Commc'ns, Inc. v. Xu, No. 4:22-CV-00048, 2022 WL 1569722 (S.D. Tex. May 18, 2022). New York case law is currently unclear about whether New York allows substituted service on a state official to bypass the Hague Service Convention requirements where mailing a copy abroad is a required element of service.
As a result of this decision, and the court's emphasis on the severity of a default judgment as a remedy to plaintiff, a plaintiff seeking to enter a default judgment should strictly adhere to the requirements of proper service. Additionally, out of an abundance of caution, plaintiffs should follow the requirements under the Hague Service Convention if the defendant is a party to the convention. The recent ruling in Texas once again demonstrates the importance of parties to transactions with counterparties in jurisdictions in which Hague Service is difficult, such as China, of including agreed-upon methods for service of process in commercial contracts, and potentially requiring an agent for service in the US in especially important contracts. We have substantial experience with seeking recognition and/or enforcing arbitral awards. If we can be of any assistance, please feel free to contact us.
 If personal jurisdiction is conferred under Article 3 of N.Y. C.P.L.R., service of process may be made on the New York Secretary of State "as agent for unauthorized foreign corporations." See N.Y. Bus. Corp. Law § 307.
 The court also concluded that the Due Process requirement was met because ICPA entered the transaction in New York and the stock purchase agreement provided that disputes arising from the transaction would be governed by New York law. Id. at 13.