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Aug 6

The End of the Commisa Saga: The Second Circuit Upholds Vacated Arbitration Award Worth Over $400M

Earlier this week, the Second Circuit put an end to the six-year saga of Commisa v. Pemex by affirming a judgment enforcing a nullified Mexican arbitration award. This landmark decision grants district courts in New York, Connecticut and Vermont limited discretion to recognize foreign arbitration awards duly annulled at their seat, where enforcement of the award is deemed necessary to vindicate “fundamental notions of what is decent and just” in the United States. The decision can be found here: Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploración Y Producción, No. 13-4022, 2016 U.S. App. LEXIS 13991 (2d Cir. 2016).

The details of the underlying dispute are covered in our earlier posts, found here and here. Following an ICC arbitration between Commisa and Pemex in Mexico, Commisa won an arbitration award in December 2009 worth $465M, including $106M in performance bonds and $59M of interest. Commisa quickly turned to the U.S. District Court for the Southern District of New York (“S.D.N.Y.”) to confirm the award, and prevailed in August 2010. Pemex appealed the S.D.N.Y.’s decision to the Second Circuit while pursuing parallel proceedings in Mexico, seeking to vacate the award. Pemex succeeded in September 2011 when the Eleventh Collegiate Court of Mexico based in Mexico City (the equivalent of the U.S. Court of Appeals for the D.C. Circuit) vacated the award on the basis of a 2009 Law of Public Works and Related Services (“Section 98”). Following the Mexican Court’s annulment decision, the Second Circuit vacated the lower court’s judgment and remanded to the S.D.N.Y. On second review, in August 2013, the S.D.N.Y. again confirmed the award (read the S.D.N.Y.’s decision here) and Pemex again appealed to the Second Circuit.

Three years later, on August 2, 2016, the Second Circuit finally issued its decision. The Court held that the S.D.N.Y. did not abuse its discretion in deciding to enforce the vacated award and noted that under the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”), a district court may choose to recognize an arbitral award nullified at its seat if enforcement of the judgment would offend domestic public policy.

The Court recognized that this case tested the tension between the principle of international comity, which demands deference to a foreign judgment in the spirit of reciprocity and respect, and the need to safeguard U.S. public policy interests.  Citing Second Circuit precedent, Judge Jacobs noted that although comity is widely applied by U.S. courts to promote international cooperation, it is subject to a narrow public policy exception, which precludes deference where the foreign judgment would “undermine public confidence in laws and diminish rights of personal liberty and property.” The three-judge panel rejected Pemex’s argument that Judge Hellerstein overstepped his authority by reviewing a foreign court’s decision on its domestic law, and concluded that the S.D.N.Y. validly exercised its discretion, bestowed by the Panama Convention, to determine whether the foreign annulment decision offended basic notions of justice under U.S. law.

Judge Jacobs found that the following considerations satisfied the narrow requirements of the public policy exception:

(i) Pemex waived its sovereign immunity by agreeing to arbitration under the contracts;
(ii) The Mexican Court’s retroactive application of Section 98 was repugnant to U.S. notions of justice and disrupted Commisa’s contractual expectations;
(iii) U.S. courts must ensure that legal claims find a forum; and
(iv) Government expropriation without compensation is prohibited and against U.S. policy.

First, the Court found that Pemex waived its sovereign immunity by entering into contracts that required both parties to resolve disputes through arbitration. The Court noted that the “Pemex Organic Law” authorized Pemex to agree to enter into arbitration agreements, and Pemex included arbitration clauses in its 1997 and 2003 contracts with Commisa. Further, Pemex participated in the arbitration proceedings without challenging the tribunal’s jurisdiction over the dispute (as Judge Jacobs wrote, “that argument was advanced only after [Pemex’s] loss was presaged by issuance of the Preliminary Award”). Id. at 31.

Second, the Court found that the Mexican annulment decision offended U.S. notions of fairness and justice because it was based on the retroactive application of Section 98, which established that disputes related to administrative rescissions were inarbitrable. The Court wrote that although the Mexican Court specifically stated that it was not retroactively applying Section 98, the sequence of events showed that the law was retroactively applied as a matter of U.S. law, as it was undisputed that Pemex was allowed to arbitrate prior to 2009 and this right was withdrawn by Section 98, “in a way that frustrated contractual expectation, undid an arbitral award, and precluded redress by Comissa in any forum.” Id. at 34.

Third, Judge Jacobs determined that denying enforcement of the 2010 award would be unjust because it would leave Comissa without any recourse to resolve its grievances and, as a matter of U.S. public policy, litigants with legal claims should have an opportunity to bring their claims before a forum. The Court stressed that Commisa had no means to seek redress because Section 98 prohibited the arbitration of disputes concerning administrative rescissions, and a 2007 law provided that matters concerning public contracts could only be brought before the Tax and Administrative Court (the “Tax Court”). The Court noted that Commisa had already attempted and failed to resolve its dispute through the Tax Court, which found that Commisa’s claim was barred by res judicata and the statute of limitations (because the Tax Court had a 45-day limit).

Lastly, the Court concluded that Pemex’s seizure of the oil platforms amounted to a taking without compensation, which is unconstitutional in the U.S. and forbidden under Article 1110 of NAFTA. Judge Jacobs noted that paying deference to the Mexican Court’s annulment decision would mean giving effect to a “taking of private property without compensation for the benefit of the government,” because the annulment decision frustrated Commisa’s relief granted by the arbitral tribunal and Commisa did not have recourse to Mexican Courts. Id. at 39.

In practice, we can expect few opportunities for New York district courts to enforce duly annulled arbitration awards. And of those petitions to enforce annulled arbitration awards, even fewer will be granted following the Second Circuit’s guidance in Commisa v. Pemex. New York district courts may only resuscitate a nullified foreign award when the foreign court’s annulment decision is repugnant to U.S. public policy, such as when a foreign court retroactively applies domestic law. This is not surprising and closely follows the reasoning of the S.D.N.Y. decision. More interesting is the Second Circuit’s apparent suggestion that a foreign court decision that validates or effects an illegal expropriation of private property (which, if it occurred in the U.S., would constitute an unconstitutional taking) can be disregarded by U.S. courts as repugnant to public policy. This point has not be raised by earlier decisions considering whether to confirm an annulled award.

The postscript to this saga, though it isn’t mentioned by the Second Circuit, is that a case like Commisa v. Pemex couldn’t happen in Mexico today. The Mexican legislature enacted sweeping reforms of its energy sector in 2014 – including a new organic law for Pemex – which expressly allow the use of arbitration agreements in state-operated project agreements. As the arbitration of commercial disputes becomes an indispensible feature of international business, opportunities for U.S. courts to invoke Commisa v. Pemex should decrease, which isn’t a bad thing.

By Jennifer Cabrera & Walsy Sáez

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