Litigation after the Arbitration Award in International Contracts


Courtesy of Internet Business Law Services

Internet protocol telecommunication networks are among the services gaining international relevance. Large and medium size companies are seeking the services of foreign Internet telecommunication networks or the equipment for this service, and celebrating contracts to this effect. Technology and cost reduction in the service maybe the main reasons motivating the signing of contracts with foreign network service providers or providers of network equipment. For these international contracts, arbitration is definitely an essential legal instrument; it saves time and money for the disputing parties. It is also true that litigation follows a great number of arbitration awards. This article provides an example of two common reasons that create dispute between parties to a contract for services involving Internet protocol telecommunication networks, and how litigation may still ensue after the arbitration award is rendered.

Covergia Networks Inc. (hereafter Covergia) is a telecommunication company incorporated and located in Canada. Covergia provides services throughout the American continent. Huawei Technologies Co. (hereafter Huawei) is a Chinese company that sells telecommunication infrastructure equipment. Huawei possesses an American affiliate called Futurewei Technologies Inc., located in Texas, U.S. Covergia entered into a contract with Huawei in which the later agreed to provide Covergia with an Internet protocol telecommunication network called Next Generation Network system. The contract provided that any disputed would be subject to arbitration and governed by the laws of New York.

A year after, Covergia alleged that Huawei failed to perform important obligations under the contract. In turn, Huawei claimed that Covergia failed to comply with an “acceptance testing” provision. Covergia filed a claim in a New York court seeking to compel arbitration. The parties reached a partial agreement during the arbitration proceedings, but some disputes remained. Covergia claimed breach of contract and fraudulent inducement and asked for damages. The arbitrators denied Covergia’s claim for fraudulent inducement because Covergia failed to provide evidence of fraudulent inducement. Regarding the breach of contract claim, the arbitrators ruled for Covergia, claiming that Huawei”s equipment did not work. Only direct damages under the contract were awarded to Covergia, and respective legal fees and costs. Indeed, the arbitrators denied consequential damages to Covergia.

Unsatisfied with the arbitration award, Covergia sought, before a New York district court, to have the award partially vacated. Covergia claimed that the award should have been modified to allow consequential damages. Also, Covergia argued that the arbitrators unlawfully omitted the analysis of causes of action for gross negligence, willful and wanton misconduct and bad faith. The district court judge held that no consequential damages were allowed under the contract provisions, and that the disputed claims were not presented as stand-alone claims in the initial claim and demand, or any amendment.

The above arbitration and subsequent civil litigation between two foreign companies provides an example of the two most common legal issues that may take a final arbitration award to a second step: the litigation step. A party not satisfied with part of the arbitration award may resort to vacate that part of the award through civil litigation. At the litigation stage, however, the contract between the parties and the initial claim become essential. If the parties excluded damages, except direct damages, it would be almost impossible for a court to grant any other type of damages not agreed upon by the parties. Also, any cause of action a party deems appropriate in the particular case at hand must be presented in that party’s initial claim or demand, or amended claim. Subsequent litigation is not the forum to initiate new cause of actions after an arbitration award has been rendered. Thus, alternative claims such as gross negligence, willful or wanton misconduct and bad faith must be expressly included in the initial claim or before the arbitration award is rendered.

The above conclusion may be obvious for American attorneys or arbitrators, but it may not necessarily be a “clear-cut” legal issue for foreign companies or international attorneys representing those companies.


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