US District Court confirms arbitral award against Pemex that was nullified at its seat

The US District Court for the Southern District of New York has confirmed an arbitral award in favour of COMMISA, a subsidiary of KBR, against Pemex, even though the arbitral award had been annulled at its seat in Mexico. In Corporación Mexicana de Mantenimiento Integral, S. De R.L de C.V v. Pemex-Exploración y Producción, No. 10 Civ. 206 (AKH), 2013 WL 4517225, (S.D.N.Y. Aug. 27, 2013), District Judge Hellerstein considered that the relevant provision of the Panama Convention, under which recognition of the award was sought, allowed him the discretion to confirm an award when the nullifying judgment violated the United States' basic notions of justice (the standard set in TermoRio). The Mexican Court had based its vacatur decision on a law that had not existed at the time the parties executed their contracts, and which left COMMISA without recourse. The US District Court therefore declined to defer to the Mexican Court and confirmed the arbitral award.

The decision provides useful guidance as to how US courts will exercise their discretion in relation to confirmation of both Panama and New York Convention awards that have been vacated at their seat. Furthermore, the case underlines the importance of selecting your arbitral seat with care.

Background

In 1997 and 2003, Pemex, the Mexican state-owned oil and gas company, entered into contracts with COMMISA, a subsidiary of KBR, for the construction and installation of natural gas platforms in the Gulf of Mexico. The contracts provided for arbitration of all disputes between the parties in Mexico City, and a provision allowing Pemex to administratively rescind the contracts. The Pemex enabling statute expressly permitted Pemex to execute arbitration agreements, consistent with principles of the North American Free Trade Agreement (NAFTA). A dispute arose between the parties in which both sides alleged various contractual breaches. Conciliation efforts broke down and COMMISA initiated arbitration. Shortly after the demand for arbitration, Pemex proceeded with its administrative rescission of the contracts.

A lengthy battle ensued in the Mexican courts and in arbitration. At the heart of the litigation, COMMISA challenged the constitutionality of the administrative rescission of the contracts but was unsuccessful, the Mexican courts holding ultimately that state agencies had a "special privilege" to issue administrative rescissions and that the aggrieved party should file suit in the appropriate Mexican court. Pemex challenged the jurisdiction of the arbitral panel on the basis that, inter alia, the Mexican court's decision deprived it of jurisdiction. Pemex did not argue that an administrative rescission was not arbitrable. The arbitrators ruled that they had jurisdiction and proceeded to hear the merits.

In the meantime, changes to Mexican law in 2007 reduced the limitation period applying to administrative rescission disputes from 10 years to 45 days, and in 2009 declared such disputes non-arbitrable.

COMMISA prevailed in the arbitration, winning approximately US$300m. Whilst COMMISA sought confirmation of the award in the US District Court for the Southern District, Pemex applied to nullify it in Mexico. Ultimately, the Eleventh Collegiate Court for the Federal District in Mexico found that Pemex's administrative rescission was an act of authority, and that as a matter of public policy it was not arbitrable. The court based its decision primarily on the "guiding principle" of the 2009 legislative change in Mexico that forbade arbitration of administrative rescissions. Pemex then applied for dismissal of COMMISA's petition to confirm the award in the District Court for the Southern District of New York.

"Which is to be given primacy, the award or the nullifying judgment?"

The judge noted that the articles governing confirmation of foreign awards under the Inter-American Convention on International Commercial Arbitration (the Panama Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) were substantively similar and that their case law precedents were generally applicable to each other.

Article 5(e) of the Panama Convention provides:

"The recognition and execution of the decision may be refused, at the request of the party against which it is made, only if such party is able to prove to the competent authority of the State in which recognition and execution are requested…[t]hat the decision…has been annulled or suspended by a competent authority of the State in which, or according to the law of which, the decision has been made." [emphasis added]

Judge Hellerstein recognised that the Eleventh Collegiate Court was clearly a "competent authority" but the question he had to decide was the meaning of "may set aside": "In other words, what is my discretion acting as a U.S. District Judge to confirm an award that a foreign country has held to be invalid?"

In order to determine the bounds of the discretion, Judge Hellerstein considered, inter alia, TermoRio SA ESP v Electranta S.P.¹ (TermoRio) in which the D.C. Circuit declined to enforce an award that had been nullified by a Colombian court. In that case, the court held that "a secondary Contracting State normally may not enforce an arbitration award that has been lawfully set aside by a 'competent authority' in the primary Contracting State" but that there is a "narrow public policy gloss on Article V(1)(e) of the [New York] Convention and that a foreign judgment is unenforceable as against public policy to the extent that it is repugnant to fundamental notions of what is decent and just in the United States."

Justice Hellerstein found that the Mexican court had violated basic notions of justice by retroactively applying the 2009 law as to the non-arbitrability of administrative rescissions in order to favour a state enterprise over a private party. This was in circumstances where Pemex had clearly waived its sovereign immunity and agreed to arbitrate its disputes, in accordance with its founding legislation and NAFTA principles. The unfairness was confounded by the fact that the 45 day limitation period had passed and the annulment left COMMISA stranded without proper recourse to litigate a dispute that the arbitrators had resolved in their favour. On this basis, Justice Hellerstein confirmed the award, holding that "under the standard announced in TermoRio, the decision vacating the Award violated basic notions of justice and that deference is therefore not required." (internal quotations omitted).

Conclusion

This is not the first time that the US courts have upheld awards despite their nullification at the seat. In Chromalloy Aeroservices v Arab Republic of Egypt,² the US District Court for the District of Columbia confirmed an award that had been vacated by the Egyptian courts (the competent authority at its seat) in deference to "[the] clear US public policy in favour of enforcement of binding arbitration clauses." (internal quotations omitted). In TermoRio, a more narrow approach developed, which permitted the court to ignore a nullifying judgment if it violated basic notions of fairness. It is likely that the US courts will maintain this narrow approach, compared to broader discretion exercised in the French courts in decisions such as Société Hilmarton Ltd v Société OTV and Maximov v NLMK, where the courts did not examine the annulment proceedings.

What is clear, however, is that parties should take great care to select a seat of arbitration with a tradition of respecting the finality of arbitration awards.

For further information, please contact Larry Shore, Partner, Mildred Ojea, Senior Associate, Robert Rothkopf, Associate, or your usual Herbert Smith Freehills contact.

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¹ 487 F.3d 923, 938 (D.C. Cir. 2007)

² 939 F. Supp. 907 (D.D.C. 1996)