Oct 3

(When) will New York courts confirm a vacated arbitration award?

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Will New York courts enforce an arbitration award that was annulled by a competent court at the seat?  A district court judge for the Southern District of New York (S.D.N.Y.) did exactly that last September in Corporación Mexicana de Mantenimiento Integral v. Pemex-Exploración y Producción, 962 F. Supp. 2d 642 (S.D.N.Y. 2013).  The case, which involved a Mexican ICC award against a state-owned oil company that was annulled by a Mexican court in 2011, has been appealed to the Second Circuit, which will hear oral arguments next month.  In the meantime, the decision in Commisa remains good law in New York, reminding us that, in the right circumstances, U.S. courts will second-guess a court decision from the arbitral seat in the pursuit of justice.

The case involves an arbitral award issued in Mexico in 2009 under the rules of the International Chamber of Commerce (the “ICC”). The arbitration concerned a dispute over the administrative rescission of various contracts between Commisa — the Mexican subsidiary of American construction company and military contractor KBR, Inc. — and PEP, a wholly-owned subsidiary of the Mexican state-owned oil company Pemex.  The tribunal awarded Commisa close to US$400 million.  The Southern District of New York (“S.D.N.Y.”) confirmed the arbitral award in 2010, but PEP pursued aggressive litigation in Mexico until the award was vacated in 2011 based on a finding that PEP’s administrative rescission could not be adjudicated in arbitration. The Second Circuit remanded the case to the S.D.N.Y. after PEP appealed its decision in favor of Commisa.

After hearing expert testimony on the Mexican litigation proceedings, District Judge Hellerstein again confirmed the arbitral award, finding that the District Court should not defer to the Mexican court’s annulment decision because it violated “basic notions of justice” and left Commisa without any recourse to resolve its dispute.  In particular, the S.D.N.Y. criticized the Mexican Court’s apparent retroactive application of a 2009 Law of Public Works and Related Services, which was not enacted until the ICC arbitration was already pending.  The 2009 Law had significantly changed the legal landscape for challenges of administrative rescissions, requiring that such challenges be brought before an administrative law court within 45 days of the rescission — compared to a ten-year limitations period that applied to contract claims brought in Mexican district courts.  By ruling that administrative rescissions were inarbitrable and that the 2009 Law applied to Commisa, the Mexican court had left Commisa without a forum to hear its case.

In his analysis of the case, Judge Hellerstein relied on the widely criticized decision In re Chromalloy Aeroservices, 939 F. Supp. 907 (D.D.C. 1996), to argue that U.S. public policy may supersede comity in certain circumstances. In Chromalloy, the D.C. District enforced an arbitral award in favor of an American defense contractor and against the Egyptian government, despite its annulment by a competent court in Egypt. The court found that the award was valid and enforceable due to the U.S. strong policy in favor of final and binding arbitration, and because the Egyptian court had vacated the award due to mistake or misapplication of law, which is an insufficient basis to deny enforcement under the Federal Arbitration Act.

Further, the S.D.N.Y. relied on Baker Marine v. Chevron, 191 F.3d 194 (2d Cir. 1999) and TermoRio v. Electranta, 487 F.3d 928 (D.C. Cir. 2007), despite their opposite outcomes. In Baker Marine, the Second Circuit affirmed a district court’s decision to refuse to enforce an award annulled by a competent Nigerian court, because the petitioner failed to provide “adequate reasons” to ignore the foreign court’s judgment. The record showed that the Nigerian court had vacated the award because it found that the tribunal improperly awarded damages, exceeded the scope of the arbitration, made inconsistent awards and incorrectly admitted parole evidence.

Similarly, in TermoRio, the Court of Appeals for the D.C. Circuit affirmed a district court decision to refuse to enforce an award annulled in Colombia.  After an ICC arbitration resulted in an award against a state-owned public utility, a Colombian Court vacated the award, finding that it violated Colombian law in effect as of the date of the agreement.  The D.C. courts declined to enforce the annulled award because nothing in the record indicated that the Colombian annulment proceedings were “tainted or that that judgment of that court is any other than authentic.” TermoRio. at 930. However, Judge Edwards’ opinion suggests that a foreign court’s judgment should get deference unless it is “repugnant to fundamental notions of what is decent and just in the State where enforcement is sought.” Id. at 938

Based on his interpretation of Baker Marine and TermoRio, Judge Hellerstein wrote that under extraordinary circumstances, U.S. district courts retain discretion to deny deference to a foreign court’s annulment.

PEP appealed Judge Hellerstein’s decision and the Second Circuit will hear oral argument on November 20, 2014.  In its pleadings, PEP has argued that Baker Marine and TermoRio do not allow the type of “plenary review” that Judge Hellerstein allegedly applied to the Mexican Court’s decision, and that Chromalloy was never “good law” in the Second Circuit anyway.  By contrast, Commisa has argued that Judge Hellerstein did not exceed his authority in analyzing the Mexican Court’s decision because he only considered the meaning and effect of the annulment decision on the parties. Also, Commisa argues that Baker Marine and TermoRio confirm Chromalloy’s holding that a court “should hesitate to defer to a judgment of annulment that conflicts with fundamental notions of fairness.” Id.

Commisa v. PEP has sparked international criticism because it suggests that U.S. courts may second-guess a foreign court’s analysis of its domestic laws and prioritize American public interests over comity. Unless the Second Circuit reverses the S.D.N.Y.’s decision TestRX review in the upcoming months, New York courts will retain great discretion to confirm and enforce foreign awards duly annulled at their seat.

By Walsy Saez & Jennifer Cabrera

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