Losing the Home Court Advantage?

Losing the Home Court Advantage? Second Circuit Recognizes Mexican Arbitral Award In Spite of Mexican Supreme Court Invalidation
David J. Hoffman

In a groundbreaking decision1, the United States Court of Appeals for the Second Circuit recognized a vacated international arbitration award increasing the possibility that the United States federal courts may be open to the enforcement of other such awards. Petitions to confirm such awards are likely to be brought in the federal courts. While the Federal Arbitration Act (“FAA”), 9 USC §§1 et seq, does not generally confer an independent basis for federal jurisdiction,2 the Chapter 2 of the FAA, 9 USC §§201-208, grants the federal courts jurisdiction to entertain petitions to confirm international awards.3 International arbitrations are subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, also referred to as the “New York Convention.”

Practitioners of international arbitration and litigation have long-awaited the decision in Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V (or “COMMISA”, a subsidiary of the American corporation KBR, Inc.) v. Pemex‐Exploración Y Producción (or “PEP” a subsidiary of the Mexican state oil company Petroleos Mexicanos, commonly known as “Pemex”). The case promised to address an issue of great interest to many practitioners: whether United States courts may enter judgment on an international arbitral award that had been vacated at its seat. The courts of other countries have addressed this question and adopted different approaches, as have many commentators, but precedent from United States courts has been scant. This question is of interest as it may affect the choice of situs for the arbitration and enforcement strategies for rendered awards.

By decision dated August 2, 2016, the Second Circuit found that the United States District Court for the Southern District of New York (Hellerstein, J.) did not abuse its discretion in entering judgment on the award, the result of an arbitration proceeding with its seat in Mexico, despite the fact that Mexican courts had annulled the award. The court’s reasoning was that the annulment was based on certain changes in Mexican law that rendered the dispute non-arbitrable and ultimately without a forum in which it could be heard. In upholding the entry of judgment, the court found that it would offend basic principles of fairness embedded in United States law to deny enforcement to the award. The reasoning of the court is notable because it analyzed the question relying heavily on purely domestic doctrines and did not situate its decision among the spectrum of international approaches. In doing so, the court eschewed an arbitration-specific approach and applied standards that may be applicable to foreign judgments and evaluating comity-based arguments in favor of foreign court decisions.

I. Facts
COMMISA and PEP entered into contracts in 1997 and 2003 related to the construction of oil platforms. Each contract contained a substantially identical arbitration clause:

23.3    Arbitration.  Any controversy, claim, difference, or dispute that may arise from or that is related to, or associated with, the present Contract or any instance of breach with the present Contract, shall be definitively settled through arbitration conducted in Mexico City, D.F., in accordance with the Conciliation and Arbitration Regulations of the International Chamber of Commerce that are in effect at that time.  The arbitrators shall be three in number, and the language in which the arbitration shall be conducted shall be Spanish.

At the times the parties entered into the contracts, Mexican law provided that Pemex and its affiliates (such as PEP) could enter into valid arbitration agreements. The latter contract did not resolve the difficulties between the parties, and in 2004, PEP seized the completed work, ejected COMMISA, and gave notice that it intended to administratively rescind the contracts. In December 2004, COMMISA filed a demand for arbitration with the ICC. Shortly thereafter, PEP did administratively rescind the contracts, which resulted in COMMISA filing a so-called amparo proceeding in the Mexican court.4 COMMISA lost on all counts.

Arbitration proceedings commenced in Mexico City in May 2005 and the Tribunal issued an interim award in November 2006 finding that it had jurisdiction and enjoining PEP from attempting to collect on enforcement bonds.

While the arbitration was underway, in December 2007, the Mexican Congress vested exclusive jurisdiction for claims arising out of public contracts (such as COMMISA’s) in the Tax and Administrative Court. The Mexican Congress also shortened the limitations period from ten years to 45 days. In addition, the Mexican Congress enacted Section 98 of the Law of Public Works and Related Services which declared that certain disputes (like COMMISA’s) involving administrative rescission could not be subject to arbitration. After the issuance of the preliminary award, PEP argued to the Tribunal that Section 98 barred arbitration of COMMISA’s claims. That claim was rejected by the Tribunal in its final award in December 2009.

The December 2009 final award awarded COMMISA approximately $300 million in damages. COMMISA promptly sought confirmation of that award in the Southern District, which confirmed the award in December 2010. PEP initiated proceedings in Mexico that resulted in the Eleventh Collegiate Court (analog to the D.C. Circuit Court of Appeals) holding that COMMISA’s claims were not arbitrable under Section 98 and annulled the award. PEP had appealed the original judgment of the Southern District confirming the award. After the decision of the Eleventh Collegiate Court, PEP moved for a remand in order to give the Southern District an opportunity to consider the Mexican legal development.

The Southern District held hearings focusing on the meaning of the Mexican legal developments. After that hearing, the Southern District declined to defer to the Eleventh Collegiate Court and entered judgment on the arbitration award.

II. Decision in the Second Circuit
In addition to the arbitration issues presented, the Second Circuit also considered extensive arguments as to personal jurisdiction and venue in the Southern District. These issues are beyond the scope of this note, as the Court did find that the Southern District had personal jurisdiction and was a proper venue.

With respect to recognition and enforcement of the award, the Second Circuit noted that the proceedings in this case were governed by both the Panama Convention5 and the New York Convention.6 The Second Circuit began its analysis by noting that there “is no substantive difference between the two” and that both exhibit a “pro-enforcement bias.”7 The Second Circuit followed the language of the Panama Convention in conducting its analysis.

A. Application of the Panama Convention
The Second Circuit noted that an award may only be refused recognition under the Panama Convention if the resisting party proves one of seven enumerated defenses set forth in Article V of the Convention. These enumerated defenses are the “exclusive grounds”8 for denying recognition and enforcement to an award subject to the Convention. Under its interpretation of the Convention, the Second Circuit held that: “a district court must enforce an arbitral award rendered abroad unless a litigant satisfies one of the seven enumerated defenses; if one of the defenses is established, the district court may choose to refuse recognition of the award.”9

While the language of the Convention suggests “the unfettered discretion of a district court to enforce an arbitral award annulled in the awarding jurisdiction”, the Second Circuit held that such discretion is “constrained by the prudential concern of international comity”, which is “vital”. Relying on its precedent regarding the recognition of foreign judgments, the court found that such judgments must be recognized unless they “would offend the public policy of the state in which enforcement is sought”10 or would be “repugnant to fundamental notions of what is decent and just in the State where enforcement is sought.”11

B. The Scope of the Public Policy Exception
Emphasizing that this public policy standard is “high[] and infrequently met”, the court would extend the public policy exception only to those judgments that “tend[] clearly to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property.”12 Synthesizing the public policy exception to the recognition of foreign judgments and the provisions of the Panama Convention, the court found that “although the Panama Convention affords discretion in enforcing a foreign arbitral award that has been annulled in the awarding jurisdiction, and thereby advances the Convention’s pro‐enforcement aim, the exercise of that discretion here is appropriate only to vindicate ‘fundamental notions of what is decent and just’ in the United States.”13

C. Failure to Recognize the Award would Offend Fundamental Notions of Justice
The Second Circuit found four ways in which the failure to recognize the award would offend those fundamental notions: “(1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.” The court found that the Mexican Congress’ effective withdrawal of sovereign immunity in rendering COMMISA’s claims non-arbitrable offended both domestic and international notions of fairness. The Mexican Congress’ actions offended not only domestic notions of fair play, which uphold the validity of waivers of sovereign immunity, but also international. As the court noted, NAFTA recognized that arbitration affords a “mechanism for the settlement of investment disputes that assures both equal treatment among investors of the Parties in accordance with the principle of international reciprocity and due process before an impartial tribunal.”14 The fact that PEP asserted these defenses which arose after the fact ran afoul of the basic principle of contract enforcement that courts are to enforce the parties’ expectations at the time of contracting.15

The retroactive application of the law also militated against the Mexican court’s decision to annul the award. The Second Circuit found that “[r]etroactive legislation that cancels existing contract rights is repugnant to United States law.” The court found that this was a deeply-rooted concept, older than the United States and also reflected in several clauses of the United States Constitution.16 Despite arguments to the contrary, and the Mexican court’s explicit determination that it was not retroactively applying the law, the Second Circuit determined that it was a retroactive determination as a matter of United States law.

The third offending factor was that the new Mexican legal regime would have deprived COMMISA of a forum for its dispute. The Second Circuit found that “[t]he imperative of having cases heard‐‐somewhere‐‐is firmly embedded in legal doctrine.” This determination was supported by the following widely recognized legal doctrines: the availability of forum non conveniens presumes a competent forum, the federal doctrine relaxing mootness requirements where a wrong is “capable of repetition, yet evading review” because otherwise parties would be left “without a chance of redress,”17 and federal habeas corpus procedures. The fact that the Mexican courts barred COMMISA’s claims made outside of the arbitration meant that “COMMISA was thus twice the victim of unforseen changes in the law [and that s]uch a result offends basic domestic principles of claim preclusion.”

As to the fourth factor, the Second Circuit determined that PEP’s actions, as an arm of the government, had they taken place in the United States, would have offended the takings clause of the Constitution. The court also noted that a similar bar on government taking without compensation was incorporated into NAFTA.18

In upholding the Southern District’s entry of judgment on the award, the Second Circuit found that the Southern District had not “second-guessed” the Mexican court with respect to their domestic law, but rather merely utilized the discretion afforded by the Panama Convention to enforce the award.

III. Commentary
Although the Second Circuit upheld the enforcement of the award the decision suggests that in the future the court will apply a high bar to enforcement of those vacated at their seat. The decision was heavily reliant on case-specific aspects in that a very strong actor closely aligned with the government, Pemex, apparently effected changes in the law to avoid the unfavorable outcome of an arbitration. The timing of these machinations appeared to be designed with the intended goal of derailing a specific arbitration to the detriment of a United States party. Whether foreign legal changes that might be less identifiable with a powerful state-aligned entity and a specific proceeding would offend the basic notions of fair play remains to be seen.

Certain elements in the court’s reasoning may not hold up to extended scrutiny. For example, examining the corpus of United States Supreme Court jurisprudence reveals that the retroactive modification of contracts is not “repugnant” to our jurisprudence. The entire New Deal revolution in economic regulation overthrowing the former Lochner regime upheld the right of the legislature to retroactively abrogate contracts. What may have been driving the court’s reasoning here was not a simple retroactive modification of contracts, which might occur any time the state regulates commerce, but in the way that these legal changes appeared to be aimed at a specific proceeding and at disadvantaging a specific non-Mexican party based in the United States. The fact that these legal changes rendered COMMISA without a forum for hearing its claims could likely be credited as a determining factor, rather than retroactivity alone.

Furthermore, the opinion is notable for its nearly exclusive reliance on its own precedents and other domestic legal authorities. It did not engage the broader international arbitration law as it exists in other countries or as it has been addressed by learned commentators. Professor Christopher Drahozal19 identified five approaches to the question: (1) the “traditional approach”, i.e. that a vacated award is not enforceable, (2) the “French approach”, where a vacated award is enforceable so long as it satisfies French standards, (3) the “Chromalloy approach” where a vacated award is enforceable so long as it meets American standards and that the parties agreed to exclude the possibility of an appeal, (4) the “LSA approach”, attributed to Jan Paulsson, where the award may be enforced provided that it was vacated on internationally recognized grounds, not local standards (called “LSAs”), and (5) the “comity approach”, attributed to William Park, which would bar the enforcement of vacated awards unless “the vacatur resulted in procedural unfairness or were contrary to notions of fundamental justice.”

The Second Circuit did not explicitly engage any of these particular schools of thought. Yet, that the court’s decision may be consistent with several of them. The decision might best fit with the approaches advocated by Jan Paulsson and Prof. Park. The Mexican annulment only met international standards under Article V of the Panama (or New York) Convention in that it was annulled at the seat, but the Mexican court decisions were based on local factors (i.e., changes in the extent of sovereign immunity, shortening of the limitations period) that are not internationally recognized factors. The court then addressed the aspects of comity, and held that it would offend our domestic notions of justice to deny enforcement of the award.

In conclusion, the Second Circuit broke new ground in disregarding the Mexican Supreme Court’s invalidation of an arbitral award. It remains to be seen whether this case will be limited to its facts or will signal a significant step toward the “French approach” of discounting the significance of foreign judicial authority. Likewise, where other foreign judicial decisions are concerned, the federal courts have generally been deferential to their decisions. It remains to be seen if the Second Circuit’s decision here foreshadows a new, skeptical eye on the actions of the foreign courts.

David J. Hoffman is of counsel to and a member of the international, intellectual property, litigation and arbitration practice groups of Dunnington, Bartholow & Miller, LLP, 250 Park Avenue, 11th Floor, New York, New York 10177. His email address is dhoffman@dunnington.com.

Endnotes
1Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex–Exploración Y Producción, 832 F.3d 92 (2d Cir. August 2, 2016)
2The Federal Arbitration Act “bestow[s] no federal jurisdiction”. Vaden v. Discover Bank, 556 U.S. 49, 59, 129 S. Ct. 1262, 1271, 173 L. Ed. 2d 206 (2009).
3Chapter 2 of the FAA, which governs arbitrations conducted pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, at 9 USC §203 provides that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.” The courts have taken an expansive view of which arbitrations are subject to the Convention, excluding only arbitrations “between two United States citizens, involves property located in the United States, [with] has no reasonable relationship with one or more foreign states, falls under the Convention.’ ” Stone & Webster, Inc. v. Triplefine Int'l Corp., 118 F. App'x 546, 549 (2d Cir. 2004)(quotes and cites omitted).
4The amparo proceeding was filed in the District Court on Administrative Matters for the Federal District. It is a proceeding in which the constitutionality of governmental acts can be challenged.
5The Inter-American Convention on International Commercial Arbitration, codified at 9 USC §301 et seq.
6The Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
7Quoting Yusuf Ahmed Alghanim & Sons v. Toys ‘R’ US, Inc., 126 F.3d 15, 20 (2d. Cir. 1997).
8Quoting id. at 20.
9Emphasis in original.
10Quoting Ackermann v. Levine, 788 F.2d 830, 837 (2d. Cir 1986)
11Quoting Ackermann, 788 F.2d at 841 quoting Tahan v. Hodgson, 662 F.2d 862, 864 (D.C. Cir 1981).
12Quoting Ackermann, 788 F.2d at 841 (internal quotes omitted).
13Quoting Ackermann, 788 F.2d at 841.
14Quoting NAFTA, art. 1115, Jan 1, 1994.
15Citing Hunt Constr. Grp., Inc. v. Brennan Beer Gorman/Architects, P.C., 607 F.3d 10, 14 (2d Cir. 2010) 16The Court cited the following clauses: the ex post facto clause, the prohibition on states’ interference with contract, the prohibition on Bills of Attainder, and the Due Process Clause.
17Quoting  S. Pac. Terminal Co. v. InterstateCommerce Comm’n, 219 U.S. 498, 515 (1911).  
18Citing NAFTA art. 1110 Jan. 1, 1994.
19Christopher R. Drahozal, Enforcing Vacated International Arbitration Awards: An Economic Approach, American Review of International Arbitration, Vol. 11, p. 451, (2000)

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