June 16, 2020 Practice Points

Fourth Circuit Confirms Chinese Arbitration Award

When dealing with foreign partners, you must be prepared to engage with that jurisdiction’s legal system.

By David Y. Loh

On June 8, 2020, the U.S. Court of Appeals for the Fourth Circuit affirmed in Denver Global Products, Inc. v. Roger Leon, et al., Docket No. 18-1853, the district court’s decision to compel arbitration and confirmed an award issued by the Chongqing Arbitration Commission. This decision in and of itself is not terribly significant but it does highlight the pitfalls of doing business overseas, especially where the requisite contracts call for disputes to be resolved in a foreign jurisdiction.

Roger Leon formed a North Carolina company called Denver Global Products, Inc., for the express purpose of selling outdoor power products made by a Chinese company called Chongqing Rato Power Co., Ltd. in the United States. Rato eventually purchased Denver but Leon remained as president. To memorialize this agreement, a series of contracts were signed by the parties. All these contracts were written in Chinese and called for disputes to be resolved before the Chongqing Arbitration Commission located in Chongqing, China. Eventually the relationship deteriorated, and Denver filed suit against Leon in North Carolina state court. Leon counterclaimed against Denver and filed third party claims against Rato.

Rato moved to dismiss Leon’s third-party claims or, in the alternative, to stay those claims and compel arbitration in China. While the motion to compel was pending, Rato also commenced arbitration against Leon in China. Despite being served with the arbitration demand, Leon did not move to enjoin the arbitration proceeding or request a stay before the Chongqing Arbitration Commission or enter an appearance in the arbitration. Unopposed, Rato was able to obtain a favorable arbitration award against Leon.

Rato then filed a motion to confirm in North Carolina state court pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (“New York Convention”). Leon removed to the U.S. District Court for the Western District of North Carolina pursuant to 9 U.S.C. § 205. Rato refiled its motion to compel and motion to confirm, and the district court confirmed. Leon timely appealed to the Fourth Circuit.

With respect to the motion to compel, Leon made two arguments. Leon said, although he admitted to signing the contract, he argued he could not have assented to the arbitration because he had neither the benefit of Chinese counsel nor an honest Chinese interpreter at the time of execution. According to Leon, there was therefore a factual dispute as to whether he actually agreed to arbitrate, and the district court erred by granting the motion to compel without conducting any fact-finding.

The Fourth Circuit reviewed the record and found that the district court relied on evidence that Leon had in fact retained Chinese counsel, and that there were witnesses that testified there was an interpreter present and had explained the contracts. However, even if it were true that Leon did not have Chinese counsel or an “honest” interpreter, the Fourth Circuit found that North Carolina law imposed a duty upon a party to read a contract and to understand its contents before signing. Therefore, the Fourth Circuit affirmed the district court.

With respect to the motion to confirm, Leon argued that he was “unable to present his case” in the arbitration. Leon claimed that his poor health and limited funds prevented him from attending the arbitration and retaining Chinese counsel to defend his interests. However, his U.S. counsel filed numerous pleadings and affidavits in the U.S. proceedings and never requested to attend the arbitration remotely or sought an adjournment of the proceedings in China. Moreover, Leon never submitted any evidence that he was financially incapable of defending himself in China. Under the circumstances, the Fourth Circuit denied each of the defenses raised by Leon.

When dealing with foreign partners, you must be prepared to engage with that jurisdiction’s legal system. Mr. Leon concluded it was not worth arbitrating in China with Rato and decided to challenge the arbitration when Rato sought to confirm. This strategy obviously failed. This case provides a cautionary tale sometimes facing Americans who do business overseas.

David Y. Loh is a member with Cozen O'Connor in New York City, New York.

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