Sarhank Group v. Oracle Corp.

Decision Date14 April 2005
Docket NumberDocket No. 02-9383.
Citation404 F.3d 657
PartiesSARHANK GROUP, Petitioner-Appellee, v. ORACLE CORPORATION, Respondent-Appellant.
CourtU.S. Court of Appeals — Second Circuit

Barry R. Fischer, New York, N.Y. (Fischer & Mandell, LLP, New York, N.Y.), for Petitioner-Appellee.

Elizabeth A. Sherwin, New York, N.Y. (Robin L. Cohen, Dickstein Shapiro Morin & Oshinsky, LLP, New York, N.Y. on the brief), for Respondent-Appellant.

Before: NEWMAN and POOLER, Circuit Judges; and BRIEANT, District Judge.*

BRIEANT, District Judge.

Respondent-Appellant Oracle Corporation ("Oracle") appeals from a judgment and amended judgment in favor of Petitioner-Appellee Sarhank Group ("Sarhank") granting its petition to confirm a commercial arbitration award rendered jointly and severally against Oracle and its wholly owned subsidiary Oracle Systems, Inc. ("Systems"), by the Cairo (Egypt) Regional Centre for International Commercial Arbitration.

Sarhank is a corporation existing under the laws of Egypt, having its principal place of business in Cairo, Egypt. Oracle is a Delaware Corporation with its principal office in California. Systems, not sued here, is a wholly owned subsidiary of Oracle established under the laws of the Republic of Cyprus.

Sarhank entered into a bilateral executory contract ("Agreement") with Systems in June 1991, which was subsequently extended annually through May 1997, to be performed within Egypt. This Agreement contained an arbitration clause submitting all disputes between Sarhank and Systems for arbitration under Egyptian law. In 1997, a dispute arose between Sarhank and Systems. Systems, acting through a different Oracle subsidiary, notified Sarhank that it was exercising its right to terminate. It did so, and thereafter, Sarhank served a demand for arbitration upon both Oracle and Systems. Oracle itself was not a signatory to the Agreement, nor did it execute any written agreement to arbitrate with Sarhank.

On April 2, 1998, an international arbitration was commenced before the Cairo Regional Centre for International Commercial Arbitration. Sarhank submitted monetary claims totaling approximately $10 million. Oracle objected to the arbitration on the ground that it was not a party to the arbitration because it had not signed the Agreement and therefore had never consented to arbitration. Purporting to apply Egyptian law, the three-member panel of arbitrators rejected this defense, deeming Oracle bound by the Agreement. On March 11, 1999, the panel issued a unanimous decision holding Oracle and Systems jointly and severally liable for $1,902,573, after an offset by an award to Systems in the amount of $28,143.

Oracle appealed this decision unsuccessfully to the Cairo Court of Appeals and the Egyptian Court of Cassation ("Egyptian Supreme Court"). While Oracle's appeal to the Egyptian Supreme Court was pending, the Cairo Court of Appeals issued an execution order on March 22, 2000, which the Egyptian Supreme Court upheld. The Egyptian Supreme Court thereafter upheld the arbitration award as well. We were informed at the oral argument that Systems had paid nothing towards the award, and is currently contesting its liability in the Courts of Egypt.

Sarhank petitioned the United States District Court in the Southern District of New York to confirm and enforce the foreign arbitration award against Oracle. Jurisdiction was premised on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("Convention"), implemented at 9 U.S.C. §§ 201-208. In support of its contention that subject matter jurisdiction existed under the Convention, Sarhank made these allegations: (1) Systems and Sarhank entered into a written agreement containing an arbitration clause; (2) Systems was a shell corporation; (3) the agreement created a "commercial legal relationship" between Sarhank, Systems, and Oracle; and (4) the Egyptian arbitral panel made an arbitration award against Oracle.

Oracle contended in the district court that the Convention did not apply and therefore the district court lacked subject matter jurisdiction; that the district court should decline to enforce the award against Oracle on the ground that Oracle was not a party to the Agreement; that the arbitrators lacked jurisdiction to determine arbitrability, the case was not ripe1 and enforcement of the award would be contrary to American public policy. The district court rejected all these arguments and enforced the award, holding that the Convention did apply, the arbitrators had the power to determine arbitrability, the action was ripe for review and that enforcement of the award would not violate American public policy. An amended judgment was filed on February 24, 2004, awarding Sarhank $105,598.01 in pre-judgment interest, increasing the total amount recovered to $2,008,171.01.

The district court's legal interpretations of the Convention are reviewed de novo, and its findings of fact are reviewed for clear error. See Pike v. Freeman, 266 F.3d 78, 86 (2d Cir.2001).

The district court concluded as a matter of law that "[t]he Convention clearly provides the basis for federal jurisdiction over the enforcement of foreign arbitration awards," as the "Convention applies to the recognition and enforcement of arbitral awards made (1) in the territory of a State other than the State where the recognition and enforcement of such awards are sought and (2) arising out of difference between persons, whether physical or legal." Sarhank Group v. Oracle Corp., No. 01-civ-1295, 2002 WL 31268635 (S.D.N.Y. October 8, 2002), slip op. at 6-7.

The District Court also concluded that the arbitrators' conclusion that the Agreement was binding upon Oracle, by virtue of a partnership relationship between Oracle and Systems, was a matter of contract interpretation that the Court would not review.

Subject Matter Jurisdiction

In its Petition to the district court, Sarhank invoked the court's subject-matter jurisdiction under 9 U.S.C. § 203. In relevant part, this section provides that "An action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States." Section 202 describes which actions "fall under the Convention." In relevant part, it provides that:

An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract or agreement described in section 2 of this title, falls under the Convention.

A United States District Court has subject matter jurisdiction over arbitral awards that arise out of commercial agreements.

Oracle argues that the district court lacked subject matter jurisdiction in the absence of a signed written arbitration agreement between Sarhank and itself, and because the district court failed to determine independently whether Oracle had consented to arbitration. Oracle's argument depends entirely upon its view of the merits of the case, and therefore does not involve a lack of subject matter jurisdiction, although cases confusing these issues are frequently found in the reports. Clearly, by statute, see 9 U.S.C. § 203, district courts have subject matter jurisdiction over cases brought to enforce arbitration awards issued under the Convention. When a party challenges the court's subject matter jurisdiction based upon the merits of the case, that party is merely arguing that the adversary has failed to state a claim. The court has and must assume subject matter jurisdiction and hear the merits of the case. Steel Co. v. Citizens for a Better Envir., 523 U.S. 83, 89, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998); Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946). Where, as here, the Petition seeks relief under the Constitution or the laws of the United States, the federal courts have subject matter jurisdiction under 28 U.S.C. § 1331, unless the federal claim is immaterial, frivolous and insubstantial or made solely for the purpose of obtaining jurisdiction. Miller v. Am. Stock Exch., 317 F.3d 134, 150 (2d Cir.2003). Sarhank claimed jurisdiction under the Convention; described a written agreement between Systems and Sarhank; in effect, alleged that a legal relationship was created between Oracle and Sarhank because Systems was a shell corporation; and described an arbitral award. Thus, Sarhank has, for subject matter jurisdiction purposes, adequately pleaded an arbitral award falling under the Convention. Because its allegations are not immaterial, frivolous, or made solely to obtain jurisdiction, the district court had subject matter jurisdiction to resolve the legal and factual questions ancillary to determining whether the Egyptian award could be enforced in the United States against Oracle. These questions are merits questions, not subject matter jurisdiction questions.2

Article V Defenses

Article V(2) of the Convention provides that a United States court is not required to enforce an agreement if its subject matter is not capable of arbitration in the United States, Parsons & Whittemore Overseas Co. v. Societe Generale de L'Ind., 508 F.2d 969, 974 (2d Cir.1974), or if enforcement of the arbitral award would be contrary to American public policy. Federal arbitration law controls in deciding this issue. See Smith/Enron Cogeneration Ltd. P'ship v. Smith Cogeneration Int'l. Inc., 198 F.3d 88, 96 (2d Cir.1999) ("When we exercise jurisdiction under Chapter Two of the FAA, we have compelling reasons to apply federal law, which is already well-developed, to the question of whether an agreement to arbitrate is enforceable.").

Under American law, whether a party has consented to arbitrate is an issue to be decided by the Court in which enforcement of an award is sought. An agreement to arbitrate must be voluntarily made, and the Court decides, based on general principles of domestic contract law, whether the parties...

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