By Apoorva J. Patel (Hughes Hubbard & Reed LLP, New York)
In a recent decision in Corporación Mexicana de Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploración Y Producción, No. 13-4022 (2d Cir. Aug. 2, 2016), the United States Court of Appeals for the Second Circuit (the “Second Circuit”) affirmed a U.S. district court’s confirmation of an international arbitration award previously vacated by a court at the arbitration’s seat in Mexico. This article provides an overview of the decision and addresses its implications on what remains a contentious issue in the international arbitration community.
I. The Underlying Dispute and Legal Proceedings
A. The Dispute
Corporación Mexicana de Mantenimiento Integral, S. De R.L. De C.V. (“COMMISA”) is a Mexican subsidiary of the U.S. construction and military-contracting corporation KBR, Inc. Pemex-Exploración Y Producción (“PEP”) is a subsidiary of Petroleos Mexicanos, also known as Pemex, Mexico’s state-owned oil and gas company. In 1997, COMMISA and PEP contracted for the construction of oil platforms in the Gulf of Mexico. The parties’ contract was governed by Mexican law and included an arbitration clause providing for the resolution of disputes through arbitration in Mexico City under the ICC Rules. Following logistical and cost issues, the parties executed a new contract in 2003 that contained a virtually identical arbitration clause. The parties’ dispute remained unresolved, and in 2004 – when the oil platforms were 94 percent complete – PEP administratively rescinded the contract and ejected COMMISA from the work sites, alleging that COMMISA had failed to satisfy contractual milestones and had abandoned the project.
B. The Legal Proceedings and Intervening Changes in Mexican Law
COMMISA commenced arbitration proceedings, which formally began in 2005. While the arbitration was pending, Mexico’s Congress passed legislation under which the domestic Tax and Administrative Court became the exclusive forum for claims related to public contracts, which also shortened the applicable statute of limitations from ten years to 45 days. The Mexican Congress subsequently enacted another statutory provision that declared certain claims, including those for the administrative rescission of public contracts, non-arbitrable.
In 2009, the arbitral tribunal concluded that PEP breached the parties’ contracts, and awarded COMMISA approximately US$300 million in damages. COMMISA successfully petitioned to confirm the award in the United States District Court for the Southern District of New York (the “Southern District”), and PEP appealed that decision to the Second Circuit. At the same time, PEP challenged the award in Mexico, the seat of the arbitration, through an amparo action. In 2011, the Mexican Eleventh Collegiate Court on Civil Matters of the Federal District (the “Eleventh Collegiate Court”) annulled the arbitral award, on the grounds that PEP’s administrative rescission was not arbitrable under the subsequently-enacted legislation. Ruling after the Eleventh Collegiate Court’s decision, the Second Circuit vacated and remanded the Southern District’s judgment, allowing the Southern District to consider the effect of the Mexican decision.
On remand, Judge Alvin Hellerstein in the Southern District considered evidence on the relevant Mexican law. However, ultimately he declined to defer to the Eleventh Collegiate Court’s ruling. He reasoned that the annulment of the award in Mexico “violated basic notions of justice in that it applied a law that was not in existence at the time the parties’ contract was formed and left COMMISA without an apparent ability to litigate its claims.” Judge Hellerstein confirmed the arbitral award, and PEP again appealed the judgment to the Second Circuit.
II. The Second Circuit’s Confirmation of the Award
The core issue before the Second Circuit was the circumstances in which a U.S. district court may confirm an international arbitration award that has been vacated at the seat of arbitration.
A. Governing Principles
The Second Circuit grounded its analysis in the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”), which is expressly incorporated in the U.S. Federal Arbitration Act. Article V(1) of the Panama Convention provides that the recognition and execution of a foreign arbitral award “may be refused” if the challenging party proves one of the seven delineated defenses. One of these defenses is that the award has been annulled or suspended by a competent authority of the country where, or under whose laws, the award was made.
In the Second Circuit’s view, U.S. courts thus have discretion to enforce arbitral awards that have been vacated in the awarding jurisdiction. However, such discretion is constrained by the prudential concern of international comity. The Second Circuit also reiterated the principle that a foreign judgment is generally conclusive unless its enforcement would offend the public policy of the enforcing state, which is a high and infrequently met standard. Based on these principles, the Second Circuit concluded that U.S. courts have discretion to enforce a foreign arbitral award that has been annulled at the seat only in order to vindicate “fundamental notions of what is decent and just” in the United States.
B. The Second Circuit’s Reasoning in Affirming the Confirmation of the Award
The Second Circuit held that Judge Hellerstein did not abuse his discretion in confirming the award because, in this case, the “high hurdle” of the public policy exception was surmounted by four considerations:
(1) The Repugnancy of Retroactive Application of Laws
The Second Circuit observed that the Mexican Congress’ adoption of new legislation, passed when the arbitration between COMMISA and PEP was already pending, departed from the law in effect at the time the parties contracted and retroactively deprived COMMISA of its contractual rights. The Second Circuit held that retroactive legislation cancelling existing contractual rights is repugnant to U.S. law. Although the Second Circuit emphasized that it was not assessing whether the Eleventh Collegiate Court’s decision to annul the arbitral award was proper under Mexican law, it nonetheless cast doubt on the soundness of that court’s reasoning.
(2) Ensuring an Available Forum for COMMISA’s Legal Claims
Further, the Second Circuit noted that only a confirmation of the award would ensure COMMISA a forum in which to bring its claims. COMMISA was unable to assert its claims in Mexico due to the retroactively shortened applicable statute of limitations and the Mexican Tax and Administrative Court’s rejection of COMMISA’s claims, which COMMISA had asserted in that court after the Eleventh Collegiate Court’s decision, on the grounds of res judicata. Thus, the Second Circuit held that COMMISA was twice the victim of unforeseen changes in Mexican law, and that COMMISA’s resulting inability to litigate its breach of contract claims in Mexico magnified the injustice against COMMISA.
(3) The Prohibition Against Government Expropriation Without Compensation
The Second Circuit concluded, in the context of its separate analysis of personal jurisdiction, that PEP should be treated as part of a foreign sovereign because, among other reasons, PEP affirmatively claimed it was an instrumentality of the Mexican government. Consequently, the Second Circuit characterized PEP’s actions to rescind the contracts and forcibly remove COMMISA from the project sites, coupled with the Mexican legislature’s actions frustrating the relief COMMISA had obtained in the arbitration and consigning it to a domestic forum where relief was already foreclosed, as a government expropriation without compensation. To illustrate the gravity of these actions, the Second Circuit noted that such an uncompensated expropriation would be an unconstitutional taking under U.S. law and would also violate the North American Free Trade Agreement’s prohibition on expropriation without compensation.
(4) PEP’s Contractual Waivers of Sovereign Immunity
Finally, under Mexican law in force when PEP executed its contracts with COMMISA, PEP was specifically authorized to enter into arbitration agreements. When COMMISA commenced arbitration, PEP also initially participated without contending that the claims were beyond the reach of arbitration. The Second Circuit thus considered PEP’s belated invocation of sovereign immunity to impair one of the core aims of contract law by defeating COMMISA’s contractual expectations.
III. Implications of the Second Circuit’s Decision
In affirming Judge Hellerstein’s confirmation of the award, the Second Circuit advised courts to “act with trepidation and reluctance in enforcing an arbitral award that has been declared a nullity by the courts having jurisdiction over the forum in which the award was rendered.” The Second Circuit also stressed that this case presented “rare circumstances,” and that the Southern District was not second-guessing the Eleventh Collegiate Court’s implementation of the law of Mexico. Nonetheless, because the nullification of the arbitral award “offend[ed] basic standards of justice in the United States,” the Second Circuit upheld the award’s confirmation. To do otherwise, the Second Circuit averred, “would undermine public confidence in laws and diminish rights of personal liberty and property.”
The implications of this decision will become increasingly evident as subsequent case law further clarifies and develops the issue of recognition and enforcement of international arbitration awards that have been vacated at the arbitral seat. On the one hand, the restrictive standard articulated by the Second Circuit generally requires U.S. courts to defer to a foreign court’s vacatur decision, absent exceptional circumstances. On the other hand, the “U.S. public policy gloss” imposed on the issue could be perceived as diminishing international comity and producing disharmony in the application of the generally recognized principles for enforcing international arbitral awards worldwide.
Despite such concerns, the Second Circuit’s decision arguably fortifies one of the principal objectives of international arbitration: facilitating the resolution of disputes in a neutral forum, free of any potential bias by domestic courts favoring domestic parties, particularly where government-owned entities are involved. To the extent there exists a potential for such home-party bias, it is sensible for courts in other jurisdictions to retain authority, albeit exceptional, to enforce awards notwithstanding their vacatur at the arbitral seat.