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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
Counsel in the International Arbitration Group of Shearman & Sterling LLP.
The United States Court of Appeals for the Second Circuit confirmed the decision of the U.S. District Court for the Southern District of New York to enforce an ICC arbitral award annulled by the Eleventh Collegiate Court of Mexico, finding that ʻgiving effect to the ... nullification of the award in Mexico would run counter to United States public policy and would be "repugnant to fundamental notions of what is decent and just" in this countryʼ. The award had been set aside by the Mexican court on the grounds that administrative rescission of a contract by a state instrumentality was an act of authority not capable of being submitted to arbitration under Mexican law
Enforcement; Annulment; Comity; Public policy; Panama Convention
In 1997, Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (‘Commisa’), a subsidiary of the U.S. company KBR, Inc., and Pemex Exploración y Producción (‘PEP’), a subsidiary of the Mexican petroleum company PEMEX, entered into a contract for the construction of oil platforms in the Gulf of Mexico. Disagreements between the parties regarding the performance of the contract ensued and prompted them to sign a new contract in 2003. Both the 1997 and the 2003 contracts provided that controversies arising from or associated with the contract should be submitted to ICC arbitration proceedings seated in Mexico and conducted in Spanish. Both contracts also included a clause providing PEP with the unilateral right to rescind the contract through the exercise of administrative powers (‘administrative rescisson’), and a provision requiring Commisa to post performance bonds.
The disagreements between the parties worsened and, in 2004, PEP gave notice of its intention to rescind the contract, alleging contractual breaches on the part of Commisa. PEP evicted Commisa from the site and seized the nearly completed oil platforms.
Commisa filed a request for arbitration in December 2004 (ICC Case No. 13613). Two weeks later, PEP rescinded the contract. Thereupon, Commisa commenced an amparo action in the Mexican Fourteenth District Court, contesting the constitutionality of the administrative rescission. The Fourteenth District Court on Administrative Matters for the Federal District and the Sixth Collegiate Court for Administrative Matters of the First Circuit rendered conflicting decisions, respectively on 23 August 2005 and 17 May 2006, on whether PEP’s rescission was an act of public authority. The issue was referred to the Mexican Supreme Court. In June 2006, the Supreme Court upheld the constitutionality of the rescission and ruled that federal district administrative courts had jurisdiction over contractual disputes relating to such rescission (Mexican Supreme Court, 2nd Chamber, 23 June 2006, amparo en revisión no. 1081/2006). On remand, the Sixth Collegiate Court found that PEP’s rescission was timely and in accordance with the requirements of the law, and dismissed Commisa’s amparo action (Sixth Collegiate Court on Administrative Matters of the First Circuit, 23 February 2007).
Meanwhile, the arbitral proceedings continued and in November 2006 the arbitral tribunal rendered an initial award, affirming its jurisdiction and enjoining PEP from collecting the performance bonds until the tribunal had rendered its final award (ICC Case No. 13613, Preliminary Award, 20 November 2006). PEP requested the arbitral tribunal to reconsider its decision and decline jurisdiction, arguing that the rescission was res judicata due to the Mexican court decisions. The tribunal dismissed PEP’s request.
In 2007, before the arbitral tribunal had rendered its final award, the Mexican Congress amended local laws and assigned sole jurisdiction over claims regarding public contracts to the Tax and Administrative Courts. It further reduced the applicable statute of limitations from 10 years to 45 days.
PEP submitted a second request to the arbitral tribunal, claiming that the rescission was an act of authority and, hence, incapable of being submitted to arbitration. The tribunal again dismissed PEP’s objection.
In May 2009, the Mexican Congress enacted Section 98 of the Law of Public Works and Related Services (‘Section 98’), pursuant to which administrative rescission ‘may not be subject to arbitration proceedings’.
In December 2009, the arbitral tribunal rendered its final award, rejecting PEP’s argument that the dispute could not be submitted to arbitration and awarding Commisa nearly USD 300 million in damages (ICC Case No. 13613, Final award, 16 December 2009).
Commisa then initiated enforcement proceedings in the District Court for the Southern District of New York, which confirmed the award in November 2010 (United States District Court for the Southern District of New York, 2 November 2010, civil action no. 1:10-cv-206 (AKH)). PEP appealed that decision to the Court of Appeals for the Second Circuit and at the same time initiated proceedings in the Mexican courts to annul the award.
After protracted litigation in the local courts, PEP filed a recourse of indirect amparo, which was decided by the Mexican Eleventh Collegiate Court (Eleventh Collegiate Court for the Federal District, amparo en revisión no. 385/2010, 25 August 2011). The court found that PEP’s ‘administrative rescission is an act of authority in exercise of its public order and general interest powers’ and, hence, could not be submitted to arbitration. It held that state judges had exclusive jurisdiction to hear matters relating to acts of authority, adding that ‘allowing an arbitral panel to review an administrative rescission would be absurd as it would make this power [of administrative rescission] nugatory, since a private individual who has no jurisdictional powers could annul it’.
The Eleventh Collegiate Court relied on Section 98 and stated that its purpose was ‘to protect the economy and public expenditure’ and to ‘provide the State with new appropriate means to that end’. The court concluded that these considerations did not ‘entail the retroactive application of the law’ and only served as a ʻcriterion to orientate, interpret, and argue the case at stakeʼ.
The court further relied on a 1994 decision by the Mexican Supreme Court, which had recognised the jurisdiction of the District Courts for Administrative Matters over administrative federal proceedings involving challenges to acts of authority concerning legislation such as the Law on Public Works.
In addition, the court held that Article 14 of the Pemex Organic Law (which establishes the federal courts’ jurisdiction over domestic disputes of any nature to which Pemex or its subsidiaries are parties ‘except in the event of an arbitration agreement’) allowed PEP to arbitrate matters relating to contractual performance, but that disputes over administrative rescission fell within the sole jurisdiction of the state courts. The court further held that although the arbitral tribunal had not ruled on the administrative rescission itself, its decision on contractual breaches touched on PEP’s reason for rescinding the contracts and so the arbitral tribunal was barred from deciding those issues. The court thus remanded the case, instructing the district court to set it aside, which the Fifth District Court duly did (Fifth District Court in Civil Matters of the Federal District, decision, 24 October 2011). Litigation over the performance bonds then took place in the local courts, with Commisa filing a claim for damages against PEP in the Tax and Administrative Court on 6 November 2012. The claim was rejected as falling outside the 45-day limitation period and because the matter was res judicata.
In light of the Mexican decision setting aside the award, PEP requested the U.S. Court of Appeals for the Second Circuit (i) to vacate the decision of the District Court for the Southern District of New York confirming the award and (ii) to remand the case. The Court of Appeals granted PEP’s request.
In a decision rendered on 27 August 2013 (962 F.Supp.2d 642 (S.D.N.Y. 2013)), the District Court for the Southern District of New York stated that Commisa had based its petition to confirm the award on the Panama Convention. It found the Panama Convention ("the Convention") applicable pursuant to the Federal Arbitration Act (9 U.S.C §§ 301–302), and considered that, under the Convention, enforcement of an award could be refused only on specific grounds (citing Figueiredo v. Republic of Peru (665 F.3d 384,397 (2d Cir. 2011)) and Yusuf Ahmed Alghanim & Sons v. Toys "R" Us (126 F.3d 15, 23 (2d Cir. 1997)). As stated in Article 5 of the Convention, recognition and enforcement ‘may be refused’ if the decision ‘has been annulled’ by a ‘competent authority of the State in which, or according to the law of which, the decision has been made’ (962 F.Supp.2d 642 (S.D.N.Y. 2013) at 654).
Having found that the Mexican Eleventh Collegiate Court was a competent authority within the meaning of Article 5 of the Convention, the District Court analysed the meaning of the terms ‘may set aside’ and the degree of the courts’ discretion to do so. To elucidate the point, it referred to existing precedents in Baker Marine v. Chevron (191 F.3d 194 (2d Cir. 1999)), Spier v. Calzaturificio Tecnico (71 F. Supp. 2d 279, 288 (S.D.N.Y. 1999)), and Termo Rio v. Electranta (487 F.3d 928, 938 (D.C. Cir. 2007)), and contrasted them with the findings in Chromalloy v. Egypt (939 F. Supp. 907 (D.D.C. 1996)). The District Court concluded that although the broad finding in the latter case had been criticised, ‘Chromalloy remains alive, for both Baker Marine and Termo Rio recognized that a district court should hesitate to defer to a judgment of nullification that conflicts with fundamental notions of fairness’ (962 F.Supp.2d 642 (S.D.N.Y. 2013) at 656–657).
The District Court considered that PEP had validly entered into the arbitration agreements pursuant to the PEMEX Affiliates Organic Law and had considered itself validly bound by those agreements, not raising any question about the arbitrability of the rescission until October 2007 (Ibid. at 658). It moreover found the retroactive application of Section 98 to be ‘troubling’ and contrary to Commisa’s ‘settled expectation’ to have the dispute arbitrated (Ibid. at 659). The court also noted that, by the time the Eleventh Collegiate Court issued its decision, Commisa was left with no means of challenging the rescission, as evidenced by the decision of the Tax and Administrative Court’s referred to above (Ibid. at 660). It thus concluded that the Eleventh Collegiate Court’s decision ‘violated basic notions of justice’ and confirmed the arbitral award (Ibid. at 661). PEP appealed the decision.
On 2 August 2016 the Court of Appeals for the Second Circuit (832 F.3d 92 (2nd Cir. 2016)) upheld the District Court’s decision, holding that:
the Southern District properly exercised its discretion in confirming the award because giving effect to the subsequent nullification of the award in Mexico would run counter to United States public policy and would (in the operative phrasing) be ‘repugnant to fundamental notions of what is decent and just’ in this country.(Ibid. at 97)
After stating that recognition of foreign awards is governed by the New York Convention and the Panama Convention, the Court of Appeals analysed the applicability of the latter Convention (Ibid. at 105). As regards the discretion afforded to courts by the Convention to refuse enforcement of an award annulled at the seat of the arbitration, the Second Circuit held that ʻdiscretion is constrained by the prudential concern of international comity, which remains vital notwithstanding that it is not expressly codified in the Panama Conventionʼ (Ibid. at 106, citing Pravin Banker Assocs., Ltd. v. Banco Popular Del Peru, 109 F.3d 850, 854 (2d Cir. 1997)). It then stated that ʻa final judgment obtained through sound procedures in a foreign country is generally conclusive … unless … enforcement of the judgment would offend the public policy of the state in which enforcement is soughtʼ (Ibid. at 106, citing Ackermann v. Levine, 788 F.2d 830, 837 (2d Cir. 1986)). A judgment would be against public policy if it were ʻrepugnant to fundamental notions of what is decent and just in the State where enforcement is soughtʼ (Ibid. at 106, citing Ackerman v. Levine at 841, quoting Tahan v. Hodgson, 662 F.2d 862, 864 (D.C. Cir. 1981)).
The Second Circuit noted that the standard for the public policy exception is high (Ibid. at 106, citing Ackermann v. Levine at 841–842, quoting Somportex, 453 F.2d at 443), as it accommodates the competing principles of ʻcomity and res judicataʼ and ʻfairness to litigantsʼ. In the case at hand, however, the court found the exception to be justified on the following grounds: (1) the vindication of contractual undertakings and the waiver of sovereign immunity (PEP had validly waived its sovereign immunity and its claim of non-arbitrability would violate Commisaʼs investment-backed expectations); (2) the notion that retroactive legislation that cancels contractual rights is repugnant to United States law; (3) the need to ensure that legal claims find a forum (Commisaʼs inability to have its contractual claims heard before the Mexican courts and the setting-aside of the arbitral award compounded the injustice); and (4) the prohibition of expropriation without compensation (PEPʼs actions, together with the decision of the Eleventh Collegiate Court concerning the application of the newly enacted Mexican law, frustrated the relief granted to Commisa by the arbitral tribunal and foreclosed any action before local courts, amounting to an unconstitutional taking in the United States). (Ibid. at 107–111, citing Tahoe–Sierra Pres. Council, Inc. v. Tahoe Regʼl Planning Agency, 535 U.S. 302, 321, 122 S.Ct. 1465, 152 L.Ed.2d 517 (2002)). PEP filed a writ of certiorari before the U.S. Supreme Court.
The parties finally settled the dispute and on 19 April 2017 the U.S. Supreme Court dismissed the petition writ for certiorari (United States Supreme Court, No. 16-956).
The Pemex-Commisa saga, and the ‘apparent’ shift in the position of the US courts on recognition and enforcement of awards set aside at the seat of the arbitration, reignited the debate on the subject. Numerous concerns expressed by scholars during the successive phases of the protracted and multi-layered proceedings revealed the tensions still surrounding the subject at various levels. For instance, attention was drawn to the sufficiency – or insufficiency – of the analysis conducted by both the Mexican and the US courts, including with respect to arbitrability ratione materiae, access to justice, parameters for the exercise of court discretion to enforce an annulled award, and the meaning of ‘basic notions of justice’ in US law (C. Darrigade, ‘États-Unis: La sentence annulée dans son pays d’origine, approche américaine, note sous District Court Southern District of New York, 27août 2013’, Revue de l’arbitrage, 2015, 183). At another level, the decisions have revived discussions on whether the validity of an award would be more appropriately decided by the courts at the seat or the courts at the place of enforcement, and on potential forum shopping (E. Silva Romero, ‘Commisa c. Pemex: Exécution d’une sentence arbitrale aux États-Unis nonobstant son annulation dans l’État du siège de l’arbitrage’, Cahiers de l’arbitrage/Paris Journal of International Arbitration, 2017, 969 at 972). Contradictory decisions and lack of harmonisation have also been subjects of preoccupation, as have the perils of allowing the recognition of annulled awards, and the proper interpretation of Article V(i)(e) of the New York Convention (M.R. Paulsson, ‘Comissa v. PEMEX The Sequel: Are the Floodgates Opened? The Russian Doll Effect further defined’, http://kluwerarbitrationblog.com/author/marike-r-p-paulsson, 11 August 2016,).
At a more fundamental level, what is at stake is the way in which different jurisdictions and scholars conceive international arbitration, namely whether an arbitral award set aside by the courts at the seat does not affect its existence and preclude the recognition and enforcement of the award in other jurisdictions (Bargues Industrie v Young Pecan Company, Paris Court of Appeal, 10 June 2004, Revue de l’arbitrage, 2006, 154; Société PT Putrabali Adyamulia v Société Rena Holding et Société Moguntia Est Epices, French Court of Cassation, 29 June 2007, Revue de l’arbitrage, 2007, 507), or whether an award that has been set aside ceases to exist (Termorio SA ESP and LeaseCo Group, LLC v Electranta SP, et al., US Court of Appeals, District of Columbia, 25 May 2007(487 F.3d 928, 376 US App.DC 242).
It remains to be seen whether the US decisions in the Pemex-Commisa saga mark a revival or broadening of Chromalloy and the US view on recognising awards, or are simply isolated occurrences. To the extent that the US decisions are rather fact-specific, it is difficult to make any predictions.
It bears recalling, in any event, that even if the Pemex-Commisa saga were to be considered a step towards a less restrictive view of the recognition of annulled awards by the US courts, there are substantial differences in the manner in which US and French courts approach the subject, which, again, reflect different views of international arbitration. As explained by one of today’s leading exponents of international arbitration, French courts ‘scrutinize’ an award, whereas US courts reason in terms of whether the decision setting aside the award may or may not be disregarded (Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff, 2010) at 142–3).