US Court of Appeals for the Second Circuit upholds decision of Southern District Court and confirms arbitral award against Pemex that was set aside at its seat

The US Court of Appeals for the Second Circuit (the Court of Appeals) has upheld the decision of District Judge Hellerstein 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), confirming an arbitration award in favour of COMISSA and against PEMEX. The award was affirmed and enforced even though it had been set aside by a court at the seat of arbitration in Mexico. In the opinion of the US Court of Appeals, Judge Dennis Jacobs, joined by Judge Raggi, found that to hold otherwise would be contrary to US public policy and "repugnant to fundamental notions of what is decent and just in this country."

The opinion is interesting for the Court of Appeals' careful consideration of the case's "truly unusual procedural history" and its relevance when considering the grounds for refusing to enforce an arbitral award under the Panama Convention (textually identical to Article V of the New York Convention). It is also interesting to consider this decision in light of the reasoning and rationale being adopted by other national courts which have also grappled with applications to enforce awards set aside at their seat.

The decision of the US District Court for the Southern District of New York (the Southern District), the background to the dispute, and the Award, have been covered by an earlier blog post here.

The Court of Appeals' reasoning

The Court of Appeals opinion focused on three key questions:

(1)        Did the Southern District have personal jurisdiction over PEMEX and was the Southern District the right venue?

(2)        Did the Southern District abuse its discretion in confirming the award?; and

(3)        Did the Southern District exceed its authority in including in its judgment $106m in performance bonds collected by PEMEX?

Only the first two questions are considered in this blog post.

On the first question PEMEX argued that the Southern District did not have personal jurisdiction over it: the venue was "extraordinarily inconvenient" and to exercise such jurisdiction would breach due process guarantees in the US Constitution. The Court of Appeals disagreed. PEMEX had originally asked that the case be remanded to the Southern District and could not change its mind on that at a later date. Furthermore, the US Constitution did not protect foreign states and their instrumentalities and, by claiming to be a part of the Mexican state to avoid being forced to arbitrate, PEMEX had clearly accepted that it was outside the scope of the US constitutional protections. On the issue of venue, all three of the judges concluded that it was indeed appropriate, although for different reasons; two judges concluding that PEMEX could not reject the venue when it had sought relief in that same venue earlier on in the case, and the other judge holding that PEMEX should not be able to put its claim that the venue was inappropriate "in abeyance" until a stage in the proceedings when "a loss on the merits appears likely".

On the second question, the Court of Appeals considered the grounds for refusing enforcement under the Inter-American Convention on International Commercial Arbitration (the Panama Convention), on the basis that there "is no substantive difference between the two", and the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). In particular, the Court of Appeals considered whether the arbitral award could or should be enforced despite having been set aside at the court of the seat (Mexico).

With reference also to the US Federal Arbitration Act, the Court of Appeals noted that under the Panama Convention, there were seven bases under which, if established, a court may choose to refuse recognition and enforcement of the award. However, that discretion to enforce was not unfettered and required consideration of the principles of comity between states in deciding whether the discretion should be exercised. Under that comity analysis, the appeal judges concluded that, in light of the unusual facts of the case, the District Court was not required to defer to the Mexican set aside ruling. In particular, that the Mexican court had annulled the arbitration award on the basis of a retroactive legislation which determined that the matter was not arbitrable despite there being contractual waivers of sovereign immunity and submission to arbitral jurisdiction. "Fundamental notions of what is decent and just" in the US required that the court exercise its discretion in light of (i) the contractual agreement to arbitrate and PEMEX's waiver of sovereign immunity, (ii) the "repugnancy" of the retroactive legislation under which the Award had been set aside, (iii) the need to ensure that COMISSA had a forum to resolve disputes and (iv) to ensure that property could not be effectively expropriated without compensation or recourse.

On that basis, the Court of Appeals determined that the Southern District had appropriately exercised its discretion to enforce the arbitral award. In reaching that conclusion, the Court of Appeals was careful not to imply that there had been any wrongdoing on the part of the Mexican court which had set aside the award. That court had only been implementing legislation which, under Mexican law, applied retroactively and was thus bound to reach the ruling it did.

Conclusion

As mentioned in our earlier blog post, the US approach to the enforcement of arbitral awards has developed since the case of Chromalloy Aeroservices v Arab Republic of Egypt when 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 narrower approach developed, which permitted the court to ignore a nullifying judgment if it violated basic notions of fairness. The decision of the Court of Appeals in this case follows a similar approach to that in TermoRio, requiring the US courts to apply the Panama Convention and New York Convention provisions and the principles of comity, whilst also giving the US courts the ability to disregard a set aside judgment if to do otherwise would violate basic notions of fairness and "fundamental notions of what is decent and just".

The US approach is by no means universal. The French courts have long held that the setting aside of an award at the seat is not, in and of itself, a ground for denying enforcement – awards are decisions of international justice, and so should be examined according to the laws of the country in which they are being enforced (see, for example, Société Hilmarton Ltd v Société OTV, Cour de cassation, 1ere Civ. (23 March 1994) and PT Putrabali Adyamulia v. Rena Holding, Cour de Cassation, 1ere Civ. (29 June 2007)). However, in the case of Malicorp Ltd v Government of the Arab Republic of Egypt and others, the English Commercial Court refused to enforce a Cairo Regional Centre for International Commercial Arbitration award on the ground that it was set aside by the Cairo Court of Appeal.  The English court held that the decision of the Cairo court to set aside the award should be given effect unless it offended basic principles of honesty, natural justice and domestic concepts of public policy.  These criteria resonate with those adopted by the US Courts.

There is not yet a consistent view on the enforcement of set aside judgments; something clearly demonstrated in the various global enforcement actions arising out of the Yukos award.  The very different methodology by France and the US in particular may suggest that convergence towards a "global approach" is unlikely. For practitioners and clients, this means that opportunities remain to enforce decisions that have suffered from having been set aside at the seat of arbitration. 

For further information, please contact Laurence Shore, Partner, Christian Leathley, Partner, Isabelle Michou, Partner, Elena Ponte, Associate, or your usual Herbert Smith Freehills contact.