Primary Holding
The Second Circuit held that while a “high hurdle” must be overcome to confirm an arbitration award when a court from the country where the arbitration took place has nullified it, the trial did not abuse its discretion for four reasons. First, enforcing the award vindicated PEP’s contract as well as its waiver of sovereign immunity given that PEP was a government-owned company. Second, enforcement counters retroactive legislation that disrupts the expectations of the parties to the contract. Third, enforcement ensured that legal claims find a forum because, given the new statute of limitations, COMMISA would have no remedy in the courts. Fourth, enforcement of the award served to prohibit government expropriation of property (the two platforms) without compensation.
In the “rare circumstances” of the case, the southern district did not abuse its discretion by confirming the arbitral award at issue because to do otherwise would undermine public confidence in laws and diminish rights of personal liberty and property.”
Facts
Under Mexico’s constitution, the state owns all hydrocarbon resources. Since 1938, the state’s petroleum company has been Petróleos Mexicanos, better known as Pemex. Pemex has four subsidiaries including Pemex-Exploración Y Producción (PEP).
In 1997, PEP entered into a contract with a Mexican subsidiary of a Texas-based corporation,KBR Inc., to build two natural gas platforms in the southern part of the Gulf of Mexico. The subsidiary was Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (COMMISA). Under the contract, PEP and COMMISA agreed to arbitrate any disputes under Mexican law in Mexico City.
In 2003, the parties executed a second contract with a nearly identical arbitration clause after PEP began to demand that the platform be fully constructed before being placed in the Gulf of Mexico. COMMISA considered this demand to be impractical given the weight of the platforms.
In March 2004, PEP gave notice that it intended to rescind the contract on the ground that COMMISA had missed deadlines and effectively abandoned the project. PEP seized the platforms, which were 94 percent complete, and kicked COMMISA out of the work sites. COMMISA filed a demand for arbitration with the International Chamber of Commerce, which formally began in May 2005.
While the arbitration was pending, Mexico passed a law under which a special court was made the exclusive forum for administrative rescission related to public contracts. The new law required disputes over public works contracts to be adjudicated in the Federal Tax and Administrative Justice Court.
The law also applied a 45-day limitations period to the dispute rather than the 10-year limitations period that had previously applied to challenges to administrative rescissions. Six months later, Mexico passed another law that ended arbitration for certain claims such as those asserted by COMMISA (Section 98 of the Law of Public Works and Related Services).
In 2009, in a lengthy decision, the arbitration panel found that Pemex had breached its contracts with COMMISA and awarded $286 million in damages. COMMISA quickly filed an action in the Southern District of New York to confirm the award, while PEP filed an action in Mexico to nullify the award.
In 2010, U.S. District Judge Alvin Hellerstein confirmed the award. PEP appealed to the Second Circuit. While the appeal was pending, the Eleventh Collegiate Court, the analog of the D.C. Circuit, held that PEP’s rescission could not be arbitrated. The court ordered that the award be annulled on the ground that that administrative rescission of PEP’s public works contracts was an exercise of public authority, and PEP could not waive its right to exercise that public authority by permitting a private arbitral panel to effectively repeal rescission. In reaching this conclusion, the court repeatedly referenced the newly enacted Section 98.
PEP moved to vacate the southern district’s judgment and remand the case in light of the Mexican court’s decision, which the Second Circuit granted. After receiving new briefs on the effect of the Mexican court’s decision, Judge Hellerstein held a three-day evidentiary again, and again confirmed the arbitration award.
Judge Hellerstein entered judgment for $465,060,206.42, which included $59 million in interest and approximately $106 million more than the original arbitral award to compensate COMMISA for the amount PEP had collected on COMMISA’s performance bond following the Mexican court’s nullification of the award. Judge Hellerstein reasoned that failing to add this amount would “undermine the award” that the court was enforcing.
Case Commentary
Pemex is the first decision by an American appellate court to affirm the confirmation of a foreign arbitral award even though a court in the forum country had nullified it. "Pemex recognized that district courts have limited discretion to enforce awards even if annulled by the courts of the arbitral forum. This power reduces the risk of opportunistic behavior by parties to a contract. As a result, companies will be more willing to engage in international transactions, particularly in states that otherwise lack impartial contract enforcement."
Brian Lehman, A Landmark Decision To Confirm Nullified Arbitration Award, Law360, August 2, 2016, available at
http://www.law360.com/articles/833918/a-landmark-decision-to-confirm-nullified-arbitration-award
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