Turning a Blind Eye to Convenience: Forum Non Conveniens and the Second Circuit’s Ignorance of the New York Convention

Figueiredo Ferraz E Engenharia de Projeto Ltda. v. Republic of Peru 2011 WL 6188497

 

INTRODUCTION

            In 2011, the Second Circuit took up the issue of Forum Non Conveniens in a case involving the enforcement of an arbitration award against the Government of Peru. Figueriredo Ferraz E Engenharia de Project Ltda sought to enforce their judgment inNew York to avoid a Peruvian statute that would significantly limit payment of the judgment. Forum non conveniens has not traditionally been applied to enforcement actions, but instead has dealt with the convenience to a party of litigating a claim in a particular forum. The Second Circuit, turning a blind eye to theNew York and Panama Convention language which expressly listed the methods by which a party could prevent enforcement, held that Ferraz’s choice of forum was a barrier to enforcement of the arbitral award rendered in their favor. Forum non conveniens is not a method prescribed by theNew York or Panama Conventions to prevent enforcement of arbitral awards. Despite this the court held that forum non conveniens prevented enforcement of the judgment that Ferraz was subject to a Peruvian limiting statute limiting the amount the award could be paid on a yearly basis. As a result of this ruling the court has opened the door to allowing governments and municipalities to limit their judgment ability via statute and argue that assets in foreign countries are inconvenient to attach to judgment using forum non conveniens.

FACTS & HOLDING

This case initially arose from a consulting agreement entered into by Figueriredo Ferraz E Engenharia de Project Ltda (“Ferraz”), The Republic of Peru (“the Republic”), the Ministry of Housing, Construction and Sanitation (“the Ministry”), and the Programa Agua Para Todos (“the Program”) in 1997.[1]  Purusant to the agreement[2], Ferraz was to prepare engineering studies on water and sewage services in Peru.[3]

Ferraz, a Brazilian company sought the enforcement of a Peruvian arbitration award in the amount of US $21,607,003 for the company’s engineering studies on water and sewage services in Peruto which the parties agreed in 1997.[4] A fee dispute arose between Ferraz and the Peruvian government in 2005 and the parties proceeded to arbitration.[5]  The agreement provided that  the parties would be subject to the jurisdiction of the courts of the City of Lima, Pero or the jurisdiction of the arbitration proceedings if they applied also.[6]

The arbitral tribunal rendered an award which ordered the Peruvian government to pay Ferraz $21,607,003.00 USD, including $5,000,000 for principal damages and accrued interest and costs.[7]

The Ministry appealed to the Court of Appeals in Lima, challenging the Award and seeking its nullification.  The Ministry argued that under Peruvian law, the arbitration was an “international arbitration” involving a non-domestic party[8] and, thus, recovery should have been limited to the amount of the contract.[9] In October 2005, the Lima Court of Appeals denied the appeal.[10] The Court held that because Ferraz had designated itself a Peruvian domiciliary in the agreement and the arbitration, the arbitration was a “national arbitration” involving only domestic parties, and thus, the Award was permissible.[11]

Peruvian law limits the amount the Peruvian government can pay per year to satisfy a judgment against it at 3% of the budget of the governmental entity against whom the judgment is rendered.[12] Because of this limitation, Ferraz did not seek execution of the award in Peru and has so far only collected US $1.4 million of the award, which Peru has voluntarily paid.[13]

In January 2008, Ferraz filed a petition in the Southern District of New York to confirm the arbitral award and obtain a judgment for US $21,607,003. The district court rejected Peru’s motion to dismiss and approved the award; Peruappealed.[14]  The petition was brought pursuant to the Federal Arbitration Act[15] (FAA), the Inter–American Convention on International Commercial Arbitration (the Panama Convention), enforceable pursuant to the FAA,[16] or, alternatively, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), also enforceable pursuant to the FAA.[17] Jurisdiction was based on the FAA[18] and the Foreign Sovereign Immunities Act (“FSIA”).[19] In opposing the motion by Peru to dismiss, Ferraz alleged that Peru had substantial assets in New York, resulting from the sale of bonds.[20]  Peru acknowledged the existence of these funds.[21] Ferraz argued that because the arbitration was an international arbitration, the judgment could be attached to any of Peru’s assets located in signatory countries of the New York and Panama Conventions, such as the United States.[22] In September 2009, the District Court denied the Peru’s motion to dismiss, which had asserted various grounds, including lack of subject matter jurisdiction under the FSIA[23] FNC[24] and international comity.[25]

The District Court ruled that the Ministry and the Republicof Peruwere a singular entity under Peruvian law and therefore subject to the award, despite the fact that it was the Ministry and not the Republic that signed the agreement with Ferraz.[26] They also held that jurisdiction was proper under the FSIA and that dismissal was not appropriate under FNC, the Agreement’s forum selection clause, or international comity.[27]  The District Court did not consider the Peruvian 3% cap in its decision but that is because they did not reach the ultimate conclusion of whether the award should be enforced or not[28]

The Second Circuit Court of Appeals reversed the District Court, holding that forum non conveniens barred federal courts from exercising jurisdiction over this action.[29] The court found that the Republic of Peru was an adequate alternative forum because a domestic statute determining the amount of compensation available to satisfy the award was “‘intimately involved with sovereign prerogative,'” and “Peruvian courts are ‘the only tribunals empowered to speak authoritatively’ on the meaning and operation of the cap statute.”[30] The court held that Ferraz’s attempt to attach the judgment to Peruvian assets located in the United States ran afoul of the doctrine of forum non conveneins and as a result the judgment should have been enforced in Peru, not the United States.[31]

LEGAL HISTORY

            The decision in Ferraz hinges on the Second Circuit’s application of the common law doctrine of Forum Non Conveneins.[32] Forum Non Conveneins (FNC) is a common law discretionary power that allows courts to dismiss a case where another court, or forum, is much better suited to hear the case.[33]

The Supreme Court most recently considered forum non conveniens in Piper Aircraft Co. v. Reyno.[34]  In Piper Aircraft, an airplane was involved in an accident in the Scottish Highlands, killing the pilot and five passengers instantly.[35] The aircraft was manufactured by the defendant in Pennsylvania, and the propeller was manufactured in Ohio.[36]  The British Department of trade found no evidence of defective equipment and indicated that pilot error likely caused the accident.[37] A California probate court subsequently appointed Gaynell Reyno, a legal secretary for the attorney who filed suit, as administratrix for the estates of the five passengers.[38] The estate filed suit against Piper Aircraft for products liability.[39] Defendant sought to block the suit in California, claiming that the laws of Great Britain should apply because the crash took place there and not in the U.S.[40] Reyno claimed that the British remedies were insufficient to compensate the estate.[41] The Court held that so long as there is a remedy available in the alternate forum, it did not matter if the remedy was clearly insufficient.[42]

The rule in Reyno is not strictly followed by lower courts, however.[43] Instead, most courts consider the adequacy of the alternative forum’s remedy as one of many factors to be balanced when deciding whether or not to grant a forum non conveniens dismissal.[44] FNC may either be invoked by the defendant in an action or can be raised sua sponte by the court.[45] The power to determine whether a forum is indeed inconvenient is at the discretion of the courts, who may dismiss the case when another court, or forum, is much better suited to hear the issues of the case.[46] In a determination of FNC the court typically analyzes a series of factors to determine the adequacy of the forum or an alternative forum.[47] Courts typically weigh these factors to determine the adequacy of the forum and its alternatives. [48]

The Second Circuit was bound by their 2002 decision in Monegasque de Reassurances S.A.M. v. NAKNafto-Gaz of Ukraine (Monde Re) which set the standard for determining issues of FNC.[49] That decision altered the way in which FNC was applied to agreements between international agreement signatories.[50]

The New York Convention, an international treaty between the United Statesand one hundred and forty two countries including Braziland Peru, allows for the enforcement of international arbitral award.[51] The New York convention acts as a vehicle for parties to oppose enforcement of arbitral awards.[52] The Convention explicitly lays out the exceptions a party may argue in order to oppose enforcement of an arbitral award.[53] Of the exceptions listed, forum non conveniens is not an explicit exception to enforcement of an arbitral award.[54] While the New York Convention does address the issue of procedural rules such as FNC[55] it does not allow for forum non conveniens to act as an exception to enforcement.[56]

Despite the New York Convention’s explicit language, the court’s decision in Ferraz was strictly guided by the Second Circuit’s 2002 decision in Monde Re.[57] In Monde Re, Petitioner sought the enforcement of an arbitration award of $88 million.[58] The petitioner sought enforcement of the award, rendered against a Ukrainian company called Ukragazprom, in New York against both Ukragazprom and the Government of the Ukraine.[59] Ukraine moved for dismissal of the enforcement petition on the basis of FNC.[60] The district court considered Monde Re’s argument that because the New York Convention allows for the enforcement of an arbitral award in any signatory state, Ukraine had accepted the United States as a convenient forum.[61]  However the district court noted that Monda Re was reading too much into the Convention.[62] The district court stated that to permit enforcement of an award in a forum that had no connection to the dispute or to the place of arbitration, would discourage the use of arbitration provisions in international commercial agreements and act to chill international trade.[63]The district court, therefore, granted the defendant’s motion to dismiss and the Second Circuit affirmed.[64]

In its decision to dismiss the Government of Ukraine, the Second Circuit noted that FNCwas a procedural rule that should apply to the parties involved.[65] The court held that “the proceedings for enforcement of foreign arbitral awards are subject to the rules of procedure that are applied in the courts where enforcement is sought.”[66] This ran contrary to the petitioner’s argument that the provisions of the New York Convention prevent FNC from being applied to proceedings to confirm an arbitral award. [67]

Relying on Monde Re, the Second Circuit has held that the procedural rules of the place of enforcement of an arbitral award are an independent basis for denying enforcement of the award.[68] Thus the Second Circuit’s analysis in Monde Re¸ has become its test for enforcement of international arbitral awards.[69]

INSTANT DECISION

1. A.     The Majority Opinion

The Second Circuit’s decision ultimately turned on a Peruvian statue that limited payment of judgments.[70] The Second Circuit found this statute, which limited the annual amount that any state agency could pay on a judgment to three percent of that agency’s annual budget, to be dispositive.[71] Similar to Monde Re, Ferraz concerned an enforcement action against a government entity in New York, to enforce an arbitration award that was rendered in a foreign country.[72] Ferraz choose New York to enforce its $21 million dollar judgment because Peru had recently sold bonds in the United States and held the money in an account in New York.[73] Additionally, Ferraz sought enforcement in the U.S. because of the Peruvian statute limiting collection to three percent.[74] As a result of that statute, by the time the case was heard by the Second Circuit, the agency had paid only $1.4 million of the $21 million award rendered in favor of Ferraz.[75]

The Peruvian Agency argued that the award should not be enforced in New York. Nevertheless the court instead dismissed on FNCgrounds, citing the existence of Peru’s three percent statute.[76] The district court denied the motion to dismiss and the Second Circuit took up the appeal.[77] The Second Circuit reversed the district court, holding that FNC barred federal courts from exercising jurisdiction over this action.[78] The court found that the Republic of Peru was an adequate alternative forum because of the domestic statute determining the amount of compensation available to satisfy the award was “‘intimately involved with sovereign prerogative,'” and that the Peruvian courts were the only courts with the power to interpret Peruvian statutory law, specifically the Peruvian cap statute and how it operated.[79]

The majority argued, and ultimately concluded, that FNCwas cause for dismissal because it was a procedural law.[80] The court focused on the procedural aspect of FNC and did not look to the language of Article V of the New York Convention, which lays out the specific limitations on enforcement of awards.[81] Instead the court noted that procedural laws, such as FNC, and compliance with these laws may act as a bar to enforcement of an arbitral award.[82]

Additionally, the court held that while a party may attach a judgment to the assets of another party if those assets are located in the United States, the fact that assets are capable of attachment does not render a foreign forum inadequate.[83] The court stated that if the capability of attachment in a foreign forum was enough to render the forum inadequate, every suit which sought to execute a judgment on the assets located in that forum would never be subject to FNC.[84]

The Second Circuit emphasized the importance of the Peruvian Government’s three percent cap statute in their FNCholding.[85] The court determined that the cap was a “highly significant public factor warranting FNC dismissal.”[86] The court found the cap to be so important that it took precedence over the traditional public policy in favor of arbitration and arbitration enforcement.[87] The court noted that enforcement of arbitral agreements and awards is the favored policy of the United States and is specifically contemplated by both the New York and Panama Conventions.[88] Despite this pro-arbitration and pro-enforcement policy, they stated that the general policy of favoring arbitration and arbitral agreements “must give way to the significant public factor of Peru’s cap statute.”[89]

1. B.     The Dissent

Judge Lynch dissented, in an opinion twice as long as the majority ruling. He argued both that the application of FNCwas contrary to the U.S.agreement to the New Yorkand Panama Conventions, and that FNCdid not apply on the facts of Ferraz[90]. In his first section of the dissent, Judge Lynch articulated that FNC is not an exception to the enforcement of an agreement, especially not an exception that has been written into or read into the New York or Panama Conventions.[91] He argued that FNC was a vague and discretionary doctrine that ran contrary to the specific language of the New York Convention.[92] In particular he noted that New York Convention Article V was drafted with the express purpose of limiting the grounds of enforcement to only those reasons enumerated.[93]

Second, Judge Lynch’s dissent claimed that even if FNCwas an available remedy for the court to consider under the Conventions, the Conventions’ language should have been narrowly construed.[94] The result of a narrow reading of the Conventions would have rendered FNC inapplicable to this case.[95] Ultimately, Judge Lynch argued that FNC was not the proper means for opposing the enforcement of arbitral awards and that the New York Convention was explicit in laying out the exceptions to enforcement and the grounds by which enforcement could be opposed.[96]

Last, the dissent addressed public policy concerns of the majority decision as separate and distinct from FNC.[97] The dissent recognized that Ferraz should not be able to escape the Peruvian statute that limited judgments as that statute was designed to protect the budget of Peru.[98] Judge Lynch pointed out the inconsistency in this rational when he stated, “that concern [for respecting the Peruvian judgment-enforcement limitation statute] is not one that sounds in the interests assessed by a forum non conveniens ruling.”[99]

            Overall the dissent expressed concern with what Judge Lynch referred to as a distortion of the law of forum non conveniens which would undercut the ability of the United States to promote and enforce international commercial arbitration agreements.[100] The dissent instead argued that the court should have held that FNC did not apply in this case.[101] The court should have held that a strict reading of the New York and Panama Conventions would have led to no other conclusion but to allow the enforcement action to proceed in New York.[102]

COMMENT

            The decision in Ferraz has been characterized by commentators, and the dissent in this case, as a far fetched application of FNC.[103] While the full ramifications of the Ferraz decision are unknown, it could have sweeping public policy ramifications.[104] The Second Circuit could serve to prevent judgments from being awarded and allow individual companies to pass statutes similar to the Peruvian Damages Cap[105] to limit their liability and make them judgment resistant.[106] The problem with the decision, which could seemingly cause this public policy shift, is twofold: first, the court ignored the express language of the New York Convention in applyingFNC; second,FNC concerns the convenience of litigation, meaning the holding the actual trial.FNC is not concerned with the convenience of a party’s ability to locate assets and attach them to a judgment.

1. A.     Turning a Blind Eye To the New York Convention

In deciding to carve out a new exception to enforcement of an arbitral award, the Second Circuit has run afoul of the United States’ treaty obligations under the New York Convention.[107] The New York Convention expressly states there are only seven exceptions to the enforcement of an award, forum non conveniens is not one of those exceptions.[108] The majority in Ferraz used the Monde Re decision to construe The New York Convention to include exceptions to enforcement for rules of procedure, specifically Article II Section 3 of the Convention^[109] which states:

The court of a Contracting State… shall at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.^[110]

The Monde Re decision did not address the treaty’s explicit statutory construction but instead referenced rules of procedure in the Convention in an attempt to carve out a new exception to enforcement.^[111] This new FNC exception acted as grounds for refusal of an arbitral award, despite the fact that a party may be signatory of the Convention and thus subject to its treaty obligations.^[112]Instead it allowed a court to defer to procedural rules, which created what scholars are calling a “slippery slope indeed.”^[113]

With the court bound by its own misguided decision in Monde Re the slope became even more slippery with their decision in Ferraz. George A. Bermann, Chief Reporter for the ALIRestatement (Third) of the US Law of International Commercial Arbitration explained that denying enforcement of an arbitral award on a purely discretionary ground like FNCis “essentially inconsistent with U.S.treaty obligations” under the New York Convention.[114]

While the majority argues that procedural rules should be an exception to enforcement of arbitral awards, forum non conveniens is not that type of rule.[115]  FNC determines whether adjudication should be conducted, but does not determine how it should be conducted.[116] The essential purpose of the New York Convention was to ensure that arbitral awards were enforced in a timely manner pursuant to international treaty obligations.[117] With this purpose in mind, the Convention enumerates specific exceptions so as to encourage enforcement of awards and not subject parties to bizarre readings of procedural rules, as the Second Circuit has done here.[118]

The Second Circuit failed to recognize the true nature of FNC: whether adjudication should be conducted.[119] In the context of an FNC claim, the court is to determine the parties’ ability to present their claims and defenses and whether or not the court can adjudicate those claims and defenses.[120]

In Ferraz, however, the court had the option of allowing enforcement of the award in New York or deferring to the Peruvian cap statute.[121] The court was uncomfortable with these options so instead chose to “shroud its decision in U.S. procedural law instead of Peruvian substantive law.”[122]

The Second Circuit’s reading of FNCin Ferraz attempts to determine the “how” of enforcing the arbitral award, instead of looking to the “whether or not” enforcement is proper, as FNC requires.[123] This approach does not clarify the reasoning of Monde Re but instead muddies the waters and allows for a shift in public policy that could act contrary to the New York Convention’s pro-enforcement regime.[124]

1. B.     Public Policy Shift

The New York Convention explicitly allows that enforcement of awards may be denied if they are contrary to public policy.[125]  Unlike FNC, public policy is an express exception listed in the convention.[126] The Second Circuit, however, takes up the issue of public policy under the guise of FNC, claiming that the Peruvian damages cap of three percent is, from a public policy standpoint, in the best interest of the United States.[127]  The decision gave effect to Peruvian public policy, in the form of the three percent cap, as a basis for denying the enforcement of arbitral awards.[128] The Ferraz decision does this, despite the fact the New York Convention clearly states that enforcement can be denied, from a public policy standpoint, only to the extent that enforcement would be contrary to the public policy of the place where a party sought to enforce the award.[129]  The award’s enforcement was sought in the U.S., however the Second Circuit felt it best to give Peru’s interest in capping damages more weight than the public policy of the U.S., which is strictly pro-enforcement.  However, U.S. public policy is not one that would favor the Peruvian cap, yet the Second Circuit attempts to substitute Peruvian public policy for American public policy.[130]   This substitution, in and of itself, defies logic[131] yet the Second Circuit’s  admits its ignorance of the New York and Panama Conventions and holds that  the Peruvian cap statute took precedence to U.S. policy.[132]

The Ferraz decision is not explicit in its deference to Peruvian public policy, however it does give Peruvian public policy the power of acting as a barrier to enforcement.[133] The New York Convention is explicit in its language that a court may deny enforcement of an award on public policy grounds only if the enforcement is contrary to the public policy of the country where enforcement is sought.[134] Enforcement, in this instance, was not sought in Peru but rather in the United States.[135] The public policy of the United States should have been the only policy consideration the courts were allowed, had they taken notice of the terms of the Convention.[136]

The result of the decision is an elaborate shell game where litigants may locate assets abroad, specifically in the U.S.and then claim that it is inconvenient to litigate there.[137] Instead parties can shift assets to a place outside of their jurisdiction and hide behind the Ferraz decision, claiming that it would be inconvenient to attach a judgment in that jurisdiction.[138] The decision also allows for governments and their agents to shield themselves from liability by passing statutes or regulations similar to the Peruvian three percent cap.[139] If they pass a statute or regulation that limits or prohibits their ability to honor an arbitral award they increase the likelihood that they can hide behind the guise of FNC, as the Second Circuit in Ferraz has distorted the doctrine.[140]

CONCLUSION

      The Second Circuit goes to great lengths to focus their decision on the public policy of Peruand stretches the concept of forum non conveniens to allow for dismissal. This misreading of the New Yorkand Panama Conventions, as well as a misapplication of the FNCdoctrine has set a precedent that would allow for parties’ to make enforcement more difficult.[141] By claiming it is inconvenient for a party to litigate abroad, despite having assets abroad, a party is essentially creating an asset shelter. It also allows them to hide behind limiting statutes that would significantly hinder a party’s ability to enforce and collect on a judgment. This decision by the Second Circuit, in its ignorance of the New York Convention, acts to deny the pro-enforcement nature of the Convention and the very purpose of the Convention itself. The decision is a slippery slope indeed.

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