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Jan 9

The Second Circuit Hears Arguments in the Commisa Case

Late last year, the United States Court of Appeals for the Second Circuit (the “Court”) heard oral arguments for the appeal of the controversial decision Corporación Mexicana de Mantenimiento Integral v. Pemex-Exploración y Producción, 962 F. Supp. 2d 642 (S.D.N.Y. 2013), where the Southern District of New York (“S.D.N.Y.”) confirmed a Mexican ICC arbitral award annulled in Mexico. On November 20, 2014 each party presented twenty-minute arguments before Judges Ralph K. Winter, Dennis Jacobs and Reena Raggi.

Pressing for the reversal of Judge Hellerstein’s decision, the respondent-appellant (“PEP”) focused on arguing the following points: (i) the District Court did not have personal jurisdiction over PEP, (ii) Judge Hellerstein overstepped his authority by reviewing a Mexican court’s analysis of Mexican law, and (iii) the Mexican court’s set-aside decision did was not repugnant to fundamental notions of justice because the petitioner-appellee (“Commisa”) still has recourse to relief in Mexico. First, according to PEP, the District Court should have applied the “minimum contacts” test to determine whether jurisdiction was proper over PEP, because PEP had due process rights as a corporation. PEP emphasized that it has due process rights because it is not a government actor for the purposes of the jurisdiction analysis, and therefore its actions should not be transmuted as actions of the state of Mexico.

When Judge Winter commented that PEP’s power to unilaterally impose administrative rescissions resonates more with state rather than agency powers, PEP replied that such rescissions are not an act of the state of Mexico but an act of a public entity to safeguard the financial interest of the state. However, the Judges noted that the key issue in deciding whether PEP is entitled to due process rights is determining whether PEP acted in sovereign capacity when it rescinded its contracts with Commisa. To illustrate this point, the Judges asked whether PEP was analogous to Amtrak, a state-owned railroad company in the United States, which does not have the power to pursue state action or to call upon protections reserved for actions of the state.

From the Judges’ perspective, the Mexican courts’ decisions labeling administrative rescissions as an “act of public authority” imply that such rescissions constitute a sovereign act. According to the Judges, New York courts should treat PEP the same way it was treated in Mexican courts; if Mexico treated PEP’s rescissions as actions of a government entity, New York courts should treat PEP as Mexico for jurisdictional purposes. In response to these comments, PEP argued that rescissions were not a sovereign act but merely a benefit available to public entities under Mexican laws applicable to public entities. Also, PEP is entitled to due process rights because precedent indicates that state-owned foreign corporations should be treated as corporations instead of foreign states, and Commisa failed to prove that PEP was Mexico’s alter ego.

Second, PEP argued that Judge Hellerstein exceeded his authority by second-guessing the Mexican court’s annulment decision as he delved into the analysis by the Mexican court and erroneously concluded that the court had applied Section 98 of the Law of Public Works and Related Services retroactively. According to PEP, the Mexican Court did not apply this law retroactively; it merely considered the statute as a guiding principle for the case. In response, Judge Raggi clarified that the S.D.N.Y. and the Court focused on the effect of the Mexican annulment decision and refrained from assessing the fairness of the Mexican judgment itself. She also stated that the effect of the Mexican judgment was unjust if it deprived Commisa of a forum.

Lastly, PEP argued that the Mexican decision did not deprive Commisa of a forum to resolve its dispute. Judge Jacobs asked what kind of relief was available to Commisa considering the expired statute of limitations of the Tax and Administrative Court, which became the exclusive judicial forum to hear public contract disputes after a 2010 decision of the Mexican Supreme Court. In response, PEP reiterated that Commisa presented its dispute in the wrong forum because, under Mexican law, arbitration is only appropriate for private disputes. Commisa should have sought recourse in Mexican courts as soon as PEP challenged the jurisdiction of the arbitration panel. Further, as PEP argued in its brief, Commisa was not deprived of a forum to hear its claims because it was able to litigate the propriety of PEP’s rescission all the way to Mexico’s Supreme Court, and it received full and fair hearings on the validity of the arbitration award.

Following this argument, the Judges asked whether the contracts’ arbitration clauses limited the scope of arbitration, and if Mexico waived its right to litigate public contract disputes through its contract with Commisa. PEP replied that the arbitration clauses did not constitute a waiver, and that the 2006 Mexican Supreme Court decision upholding the constitutionality of administrative rescissions should have put Commisa on notice that it arbitration was not the proper forum.

Arguing for the affirmation of Judge Hellerstein’s decision, Commisa focused on three main points: (i) PEP contractually agreed to arbitrate any dispute arising out of its contracts with Commisa, (ii) the effects of the Mexican set-aside decision were repugnant to fundamental notions of fairness due to retroactive application of laws, and (iii) the District Court had jurisdiction over PEP under the Foreign Sovereign Immunities Act. First, Commisa argued that the contract did not define administrative rescissions as a sovereign act that was outside of the scope of the contract. As such, Commisa had no reason to doubt the enforceability of its arbitration agreement.

Second, Commisa argued that the effects of the Mexican annulment decision were repugnant because Commisa was left without a forum to argue the merits of its dispute. When the judges asked what standard should apply to decide whether the effects of the foreign decision were repugnant, Commisa argued for the use of the Baker Marine and Termo Rio standards. See Baker Marine v. Chevron, 191 F.3d 194 (2d Cir. 1999); TermoRio v. Electranta, 487 F.3d 928 (D.C. Cir. 2007). According to Judge Hellerstein, Baker Marine implies that district courts may decline deference to a foreign decision to nullify an arbitral award under extraordinary circumstances, and Termo Rio suggests that courts should be hesitant to follow foreign judgments that fundamentally violate U.S. public policy.

Commisa reiterated that it tried and failed to have the merits of its dispute heard in the Tax and Administrative Court in 2012, when the court decided that the suit was barred by its 45-day statute of limitations. Also, contrary to PEP’s allegations, the 2006 Supreme Court decision did not notify Commisa that it was required to litigate, because it did not indicate that relief for disputes involving administrative rescissions was unavailable in arbitration. Commisa emphasized that the result was unjust because it showcased bias for state entities; PEP as a state entity sought recourse with the state after losing at an arbitration proceeding in order to circumvent its contractual obligations. Further, the decision was based on the retroactive application of laws, because Section 98 was cited to support that administrative rescissions were inarbitrable.

Finally, to address PEP’s jurisdictional arguments, Commisa argued that PEP should have foreseen that confirmation of the award would occur in the United States because PEP has property in the U.S. that could be used to satisfy the arbitral award. Commisa also argued that jurisdictional discovery would show whether PEP should be treated as a sovereign rather than a corporation.

This past October, the Second District requested an amicus curiae letter brief from the United States government to express its views with respect to the case. The Court is expected to receive the views of the U.S. government by January 16, 2014, and will decide in the upcoming months whether to affirm or reverse the S.D.N.Y.’s decision to confirm the nullified award in favor of Commisa.

By Walsy Saez

If you would like to know more about confirming an arbitration award in New York courts, please email us at info@panlegal.net.