Confirmation of Arbitration Award Nullified in Mexico

Up to 90% of international contracts provide that disputes with be arbitrated. Moreover, most parties to such contracts honor the arbitration award once it is rendered. Some studies have shown that once an arbitrator or panel issues the award, the non-prevailing party satisfies the award voluntarily more than 90% of time.  

When the party does not honor the award, and the parties continue into litigation, the non-prevailing party usually seeks to set aside the award while the prevailing party seeks to enforce it in one or more places.  In the United States, the two treaties that govern the domestic enforcement of foreign arbitral awards are commonly referred to as the “Panama Convention” and the “New York Convention.”

Both conventions, which largely replicate each other, give courts the discretion to enforce an arbitration award that has been vacated in the country.  For example, article V of the Panama Convention states: “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” one of seven defenses. 

As one might expect, a court enforcing a vacated award is a rare event. Prior to 2014, the only reported case in the United States to enforce a vacated arbitration award was In Re Chromalloy Aeroservices and the Arab Republic of Egypt.  In Chromalloy, a United States District Court enforced the award even though it had been vacated in Egypt.  Two subsequent cases, however, distinguished Chromaloy when honoring a decision from a foreign court that set aside the arbitration award.

Corporacion Mexicana De Mantenimiento Integral v. Pemex-Exploracion, No. 13 Civ. 4022 (2d Cir. Aug. 2, 2016) (Jacobs, J.) is thus noteworthy because it is now one of the few times a U.S. court has enforced a vacated arbitration award and the first time a court of appeals has done so.

Petróleos Mexicanos, better known as Pemex, is a petroleum company owned by Mexico (all petroleum and hydrocarbons in Mexico belongs to the state).  Pemex has four subsidiaries including PemexExploración Y Producción (“PEP”). In 1997, PEP entered into an agreement with COMMISA, a Mexican subsidiary KBR, Inc. (formerly Kellogg Brown & Root), to build two natural gas platforms in the southern part of the Gulf of Mexico. 

Pemex and Pep agreed to arbitrate any disputes under Mexican law.  A second contract was agreed to in 2003 after the parties disagreed over whether the oil platforms would be fully constructed before being put into place in the Gulf of Mexico.  The second contract had a virtuallyidentical arbitration clause.  After PEP indicated that it was going to rescind the contract (over the issue of the platforms), COMMISA demanded arbitration and PEP rescinded the contract.

After a number of twists and turns, the arbitration tribunal found that it had jurisdiction and entered a $300 million award in favor of COMMISA. But while the arbitration was proceeding, Mexico enacted a new law under which a special court was made the exclusive forum for administrative rescission disputes and such disputes were made non-arbitrable.  The law also shorted the statute of limitations to forty-five days from 10-years.  One of the arbitrators dissented from the tribunal’s award given the new law.

After COMMISA filed an action in the Southern District of New York, PEP filed an action in Mexico, “which eventually made its way to the Eleventh Collegiate Court, the analog of the United States Court of Appeals for the District of Columbia Circuit.”  The Eleventh Collegiate held that PEP’s rescission was not arbitrable and ordered that the award be annulled; its analysis repeatedly referenced the newlyenacted law. 

After receiving new briefs on the effect of the Eleventh Collegiate Court’s decision, the Southern District conducted a threeday evidentiary hearing chiefly focused on the meaning of applicable Mexican legal provisions.  The Southern District enforced the awarded and added $106 million to the judgment including $59 million of interest.

The Second Circuit held that the Southern District’s decision should be reviewed for an abuse of discretion.  Although a “high hurdle” must be overcome when a court from the situs of the arbitration nullifies an award in that country, the Southern District did not abuse its discretion in so holding  because it vindicated fundamental notions of what is decent and just in the United States for four considerations. 

First, enforcement vindicated the contract and the waiver of sovereign immunity by the government-owned company.  Second, it countered the repugnancy of retroactive legislation that disrupts contractual expectations.  Third, it 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 without compensation. 

Because Article 5(e) of the Panama Convention is substantially similar to Article V(1)(e) of the New York Convention, the decision will impact how courts interpret both conventions.  Yet, such impact would seem to be limited to the egregious situations such as when a government breaches a contract, seizes the nearly complete oil platforms and passes a new law in an attempt to retroactively avoid arbitration.