Companies that are successfully expanding their business beyond the United States or aiming to grow their business globally may find that understanding the world of international arbitration can be a valuable tool for protecting business interests and rights and is an effective forum for resolving many cross-border disputes.

On June 27, 2024, the U.S. Court of Appeals for the Fourth Circuit (“Fourth Circuit”)[1] issued its decision in the Estate of Ke v. Yu[2], which affirmed the District of Maryland’s judgment confirming a foreign arbitral award that was issued by an arbitration panel in Hong Kong.

In that case, Stephany Yu (“Yu”) entered into a business partnership in the early 2000s with four other people, including Ke Zhanggaung (“Ke”), with the purpose of buying and developing real estate in China.  The business partnership was restructured in 2010 and resulted in an executed agreement that included an arbitration clause.  The arbitration clause provided that any dispute arising out of the agreement (including terms that set forth the division of their interests, payments, and transfers of stocks and property) would be resolved by arbitration before the Hong Kong International Arbitration Center under Hong Kong law.

Over the following years, the business partners had trouble implementing the agreement.  In 2013, two of the partners, including Ke, initiated arbitration in Hong Kong against the other three partners, including Yu.  During the arbitration proceedings, Ke died, and the arbitration panel substituted the Estate of Ke as a claimant.  In 2018, the Hong Kong Panel issued a final arbitral award favorable to the Estate of Ke and the other claimant.  The award contained nine orders.  Notably, in one of the orders, the Hong Kong Panel required that Yu and the two respondents, jointly and severally, pay the Estate of Ke and the other claimant in the amount of RMB 10,346,211[3], as compensation for their losses, with one-half going to each claimant.

Although Yu paid the other claimant his half in compliance with the award’s order, a dispute arose surrounding the method by which Yu was to make the payment to the Estate of Ke.  To enforce the award against Yu, the Estate of Ke filed a petition in the federal district court of Maryland (where Yu had been residing since 2016) to confirm the award’s order.  The district court granted the Estate of Ke’s petition for recognition and enforcement of the arbitral award, and Yu appealed to the Fourth Circuit.  The Fourth Circuit affirmed the district court’s judgment.

Although the Fourth Circuit has ruled on questions regarding the recognition and enforcement of arbitral awards in the past[4], its discussions and reasons behind its decision further shape the landscape of how foreign arbitral awards are treated here in the United States.

WHY FOREIGN ARBITRAL AWARDS HOLD SO MUCH WEIGHT WITH U.S. COURTS

The U.S. is a signatory to the international treaty, formally entitled “The Convention of the Recognition and Enforcement of Foreign Arbitration Awards”, dated June 10, 1958 (“NY Convention”).  The U.S. implemented the NY Convention into a body of laws, known as Chapter 2 of the Federal Arbitration Act[5] (“FAA”).

The NY Convention and the FAA view foreign arbitral awards as similar to a court judgment and provide a mechanism for their enforcement in a simplified proceeding.  To this end, a party that obtains a favorable arbitral award can then petition a U.S. federal court (usually in a court where the other party or that party’s assets are located) to recognize the validity of the award and enforce the orders contained in that award with the same effect as any other judgment issued by a U.S. court.

WHY PROCEEDINGS TO CONFIRM A FOREIGN ARBITRAL AWARD ARE NOT A SECOND BITE AT THE ARBITRATION APPLE

If your business has obtained a favorable international arbitral award and is looking to enforce the award here in the U.S. . . .

The good news is the other party does not get a second bite at the arbitration apple and that you will not need to re-litigate the merits of your claims.  In other words, you will not need to prove the substance or merits of your case again to the courts here in the U.S.   

The intent of incorporating the NY Convention into the FAA is to give deference to the foreign arbitration forum that has already made those complex factual determinations, including the determination that one party has met their burden of establishing their claims and what remedy is appropriate.  Accordingly, “[i]n confirmation proceedings under the New York Convention, there is no case to try, only a binding award to recognize and enforce.”[6]

However, as the prevailing party, your business may still need to overcome certain challenges that the opposing side may raise.  The NY Convention provides for certain defenses as grounds for when a court may refuse to confirm the award.  It is best to work with an attorney who understands the NY Convention, the FAA, and the procedural laws and rules of the U.S. and can evaluate and counsel you on those circumstances.

For a business that has received a foreign arbitral award that is unfavorable and may have to defend against the award here in the U.S. . . .

Especially considering the NY Convention, the U.S. has a strong national policy in supporting arbitration.  Thus, the likelihood of convincing a district court within the Fourth Circuit to refuse to recognize and enforce a foreign arbitral award is low.

Unlike defending a case that is being litigated in the “traditional” sense, the grounds for refusal under the NY Convention are limited to the following authorized defenses:

• The award is not valid.
• The respondent was not given proper notice.
• The award exceeds the scope of the submissions to arbitration.
• The arbitral tribunal was not properly composed.
• The award is not yet binding.
• The subject matter in dispute is “not capable settlement by arbitration” under the law of the issuing county.
• The recognition or enforcement of the award would be contrary to the public policy of that country.

Even with these defenses, the non-prevailing party does not get a second bite at the arbitration apple.  That is because none of the listed defenses allow a party to re-argue the merits or the substance of the underlying case.  The Fourth Circuit explained that “when the [foreign] award is taken to another country for confirmation and enforcement, the issues in dispute and the relief granted are treated as fully resolved.”[7]  In trying to convince the court not to recognize and enforce the award, the focus is not on the underlying dispute; rather, the defenses center on the award itself.

In the Estate of Ke v. Yu, Yu raised a defense of forum non conveniens to dismiss the case when it was pending before the District Court of Maryland.  Forum non conveniens (which is Latin for “an inconvenient forum”) challenges a court’s jurisdiction over the case.  A court that agrees with the defendant’s arguments concerning forum non conveniens may dismiss the case on the basis that there is another court – usually within another sovereignty or nation – that is more convenient or appropriate for the parties and in the interest of justice to decide the case.

In assessing the case under the rules of the NY Convention, the District Court of Maryland had concluded that Yu’s forum non conveniens defense did not fall under the NY Convention’s exclusive defenses.  During this appeal, the Fourth Circuit did not directly address whether it agreed with the district court’s particular rationale.  It instead found that forum non conveniens – in this specific situation – was not applicable, regardless of whether it could be considered a defense under the NY Convention.  The Fourth Circuit concluded that because Yu was a resident of and held assets in Maryland there was no challenge to enforcing a foreign arbitral award in a U.S. Court against an arbitral debtor, who was within the U.S. court’s jurisdiction and who held assets there.  Therefore, the District of Maryland was an appropriate and convenient forum.[8]

During this portion of its discussion, the Fourth Circuit did note that other Circuits have held that forum non conveniens (an argument relating more to a rule of procedure) can serve as a defense under the NY Convention.  It also acknowledged that any judicial proceeding – even a petition to confirm arbitral awards – is “always subject to satisfying jurisdictional requirements and venue”[9].  Even though the general question of whether forum non conveniens falls with the NY Convention’s defenses was not fully answered by the Fourth Circuit, the takeaway is this . . .

. . . As the Fourth Circuit continues to shape the landscape of foreign arbitral award confirmations, it is extremely important to engage an attorney who can help your business navigate through the applicable U.S. court civil procedure rules in connection with the NY Convention and the FAA.   

If your business is moving into transacting on a global scale, an ounce of prevention is worth a pound of cure.

Even if you do not anticipate taking any first bites at the arbitration apple, but your business is growing internationally, now is still the best time to consider the benefits of negotiating and adding an arbitration agreement to your next international business contract.  Given that the U.S. is a signatory of the NY Convention and has already implemented it into the FAA, incorporating a well-defined arbitration agreement into your contracts with foreign businesses can provide an efficient and effective means of addressing transactional conflicts that may occur.  It also serves to give you some proactive control in the arbitration process and can help avoid the uncertainty of where your case should be heard and later enforced.

[1] The Fourth Circuit hears appeals from the federal district courts in Maryland, Virginia, West Virginia, North Carolina, and South Carolina.

[2] No. 23-114, 2014 WL 3189327, at *1 (4th Cir. Jun. 27, 2024).

[3] The renminbi (RMB) is the official currency of China.  The Fourth Circuit noted that the U.S. dollars (USD) equivalent of RMB 10,346,211 is approximately $1.63 million.  Id.

[4] See e.g., Reddy v. Buttar, 38 F.4th 393 (2022) (enforcing a Singaporean arbitral award under the NY Convention against a citizen and resident of North Carolina, arising from a business dispute over an agreement involving the sale of real property in the Philippines).

[5] Codified as 9 U.S.C. § 201 et seq.

[6] Estate of Ke, 2024 WL 3189327 at *5.

[7] Id. at *4.

[8] Id. at *5-6.

[9] Id. at *4.