Fourth Circuit Rejects Forum Non Conveniens Defense to Enforcing Arbitral Award
July 30, 2024
The New York Convention governs the recognition and enforcement of most foreign arbitral awards in the United States. Article V of the Convention sets forth limited grounds on which enforcement may be refused. But Article III makes the enforcement of foreign arbitral awards subject to “the rules of procedure of the territory where the award is relied upon.” The Second Circuit has read that language to permit dismissal of enforcement actions under the federal doctrine of forum non conveniens.
In Estate of Ke v. Yu, the Fourth Circuit refused to embrace this position. While technically leaving the question open, the court of appeals strongly suggested that forum non conveniens should be limited to trials of the merits and should never employed when only enforcement is at issue.
The Fourth Circuit also rejected two other defenses to enforcement of the Hong Kong arbitral award in this case. It rejected the award-debtor’s argument that the enforcement action should be dismissed for failure to join indispensable parties. And it rejected the argument that enforcement would violate U.S. public policy by requiring violation of Chinese currency regulations. Finally, the court upheld the district court’s decision to render judgment in U.S. dollars, converting from the currency used in the arbitral award (Chinese RMB) at the exchange rate on the date of the award.
The Hong Kong Award
On February 28, 2018, an arbitral tribunal in Hong Kong ordered Stephany Yu and her two sisters to pay 10,346,211 Chinese Renminbi (RMB)—approximately $1.63 million— to Xu Hongbiao and the estate of Ke Zhengguang for losses from a real estate venture in China. The tribunal subsequently added attorneys’ fees, arbitration fees, and interest.
Yu paid Xu his half of the award by having one of the venture’s Chinese subsidiaries wire RMB to Xu’s bank account in China. Yu professed willingness to do the same with respect to the money owed to Ke’s estate. But the estate wanted to deposit the funds with a bank in Hong Kong, and Chinese currency regulations prohibited the transfer of RMB paid in China to a Hong Kong bank account.
To enforce the award, Ke’s estate brought an action against Yu in federal court for the District of Maryland. Yu is a U.S. citizen and has lived in Maryland since 2016. Ke moved to dismiss under the doctrine of forum non conveniens, for failure to join indispensable parties, and on grounds of public policy. She also asked that any judgment against her be denominated in RMB and made payable only in China. The district court rejected Yu’s defenses and entered judgment against her in U.S. dollars, using the exchange rate on the date of the original award for the original amount and subsequent exchange rates for the attorneys’ fees etc. The Fourth Circuit affirmed, with Judge Niemeyer writing for a unanimous panel.
Forum Non Conveniens
The New York Convention governs the recognition and enforcement of foreign arbitral awards from other countries that are parties to the Convention. Almost every significant commercial state is party to the New York Convention, including China, which has extended the Convention to cover Hong Kong. The Convention requires state-parties to recognize and enforce foreign arbitral awards subject to a limited number of defenses set forth in Article V. The convenience of the parties is not one of those defenses.
Article III of the Convention provides, however, that “[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon” (emphasis added). Yu argued that forum non conveniens is a rule of procedure that applies to the enforcement of arbitral awards.
The Second Circuit held that forum non conveniens may be applied to actions for the enforcement of foreign arbitral awards in In re Arbitration between Monegasque De Reassurances S.A.M. v. Nak Naftogaz of Ukraine (2002) and reaffirmed that holding in Figueiredo Ferraz e Engenharia de Projeto Ltda. v. Republic of Peru (2011) over a strong dissent by Judge Lynch. On the other hand, the D.C. Circuit held in TMR Energy Ltd. v. State Property Fund of Ukraine (2005) that forum non conveniens does not apply in actions to enforce a foreign arbitral award because there is never an alternative forum available that could enforce the award against property in the United States. In addition, the Restatement of International Commercial and Investment Arbitration takes the position in § 4.27 cmt. b that applying forum non conveniens in this context violates the United States’ obligations under the New York Convention.
In Estate of Ke, the Fourth Circuit seemed to side with the D.C. Circuit. Besides quoting TMR Enegy on the lack of an alternative forum, Judge Niemeyer noted that forum non conveniens “is designed to remedy the challenges of trying a case in an inconvenient forum,” whereas “such inconveniences are hardly ever at issue [in an enforcement action] due to the limited nature of the proceeding.”
In the end, however, the Fourth Circuit found it unnecessary to decide the question. Even if forum non conveniens were available, the court reasoned, “this proceeding involves the straightforward attempt to enforce a foreign arbitration award in a U.S. court against an arbitral debtor within the U.S. court’s jurisdiction and with assets there.” Despite the court’s cautious approach, however, Estate of Ke adds to the line of authority against applying forum non conveniens in actions to enforce foreign arbitral awards.
Failure to Join Indispensable Parties
Yu also argued that the enforcement action had to be dismissed under FRCP 19 for failure to join indispensable parties, namely the corporate entity through which the real estate venture operated and Xu, who was the estate’s co-claimant. Their presence was necessary in order to enforce the Hong Kong tribunal’s orders on specific performance, Yu argued.
But, as the Fourth Circuit correctly noted, the estate was not seeking recognition and enforcement of the arbitral tribunal’s orders for specific performance, just its orders for damages and fees. Because the corporate entity was not a co-obligor on these orders and because Xu had already been paid, their presence was neither required nor indispensable.
Public Policy
Yu further argued that enforcement should be denied because it would violate the public policy of the United States. Public policy, unlike the convenience of the parties, is a ground for non-recognition under Article V of the New York Convention.
Yu’s public policy argument was a bit odd. She asserted that she could not transfer RMB from China without violating Chinese currency regulations. U.S. public policy was implicated, she reasoned, because “the fundamental U.S. policy of international comity” requires respect for Chinese law.
Judge Niemeyer rejected the premise of Yu’s argument. “The Hong Kong arbitration proceedings and award is not a transaction in China that effectively exports currency from China,” he noted. Although the award required payment of RMB, it did not require that the money come from China. “Enforcing the Hong Kong award denominated in RMB is no more violative of U.S. public policy than would be enforcing an award entered in Hong Kong dollars,” Judge Niemeyer reasoned. “Indeed, it is U.S. public policy to provide for the confirmation of any such award in the United States, in accordance with the terms of the Convention.”
Conversion to Dollars
The final issue, and in some ways the most complex, is whether the district court properly entered judgment in U.S. dollars, given that the award was denominated in RMB, and whether the district court was right to use the exchange rate prevailing on the date of the award. Until 1982, federal legislation was read to require federal and state courts to enter judgments exclusively in dollars. But since repeal of that law, the trend has been towards permitting judgments denominated in foreign currencies.
In upholding the district court’s judgment, the Fourth Circuit relied on Restatement (Third) of Foreign Relations Law § 823, which acknowledged that courts in the United States have discretion to enter judgments denominated in foreign currencies and discretion with respect to the exchange rate used. The court of appeals was seemingly unaware that this provision was superseded by § 490 of the Restatement (Fourth), which now expresses a preference for not converting foreign currency obligations into dollars and, if conversion is necessary, for using the exchange rate prevailing on the date of the U.S. judgment.
The Fourth Circuit was also seemingly unaware that state law might have something to say about these questions. The Uniform Foreign-Money Claims Act, adopted in 20 states and the District of Columbia prohibitsconversion of foreign judgments to U.S. dollars. Maryland, however, has not adopted the Uniform Act. Instead, Maryland has its own legislation requiring that court judgments be entered in dollars, though the law says nothing about exchange rates. If the estate had sought to enforce a Hong Kong judgment rather than an arbitral award, the district court would have been required to convert the foreign judgment to dollars because, under Erie, the recognition and enforcement of foreign judgments in the United States is governed by state law.
Of course, in Estate of Ke, the district court was not enforcing a foreign judgment but rather a foreign arbitral award. The recognition and enforcement of foreign arbitral awards is governed by federal law, specifically the New York Convention and the Federal Arbitration Act (FAA). Although neither the Convention nor the FAA address converting foreign arbitral awards to different currencies, they do create space for federal courts to depart from state law on these questions. The question is whether federal courts should depart from state law.
The Arbitration Restatement says nothing about this, but the Restatement (Fourth) does in Reporters’ Note 2 to § 490. The note observes that a foreign judgment confirming an arbitral award would be subject to state law on the recognition and enforcement of foreign judgments, and so, for the sake of uniformity, it might be wise for federal courts to apply the same state law when enforcing foreign arbitral awards directly. In this case, that would mean converting the award to dollars, as the district court did. With respect to the exchange rate, the district court departed from the “widely accepted” rule that uses the exchange rate on the date of judgment, but I’m not aware of any Maryland law that specifically forbids this.
The bottom line is that these questions are hard, much harder than the Fourth Circuit’s decision lets on.
Conclusion
The decision in Estate of Ke lands in the right place. In my view, the court of appeals was clearly right to reject the defenses of forum non conveniens, failure to join indispensable parties, and public policy. It was probably also right to allow the district court to enter judgment in dollars, although using the exchange rate prevailing on the date of the award rather than that prevailing on the date of judgment departs from the Restatement (Fourth)’s position. But if the Fourth Circuit got this last question right, it seems to have done so largely by accident.