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US Federal Court Refuses to Defer to Foreign Court; Enforces Arbitral Award Annulled at Seat

On August 27, 2013, US District Court Judge Alvin K. Hellerstein of the Southern District of New York confirmed an arbitration award that the Mexican judiciary had nullified at the seat of arbitration. The court based its decision on a violation of “basic notions of justice.”

Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. PEMEX-Exploración y Producción, 2013 U.S. Dist. LEXIS 121951, 2013 WL 4517225 (S.D.N.Y. Aug. 27, 2013), concerned a 2009 arbitral award rendered in Mexico City under the rules of the International Chamber of Commerce Court of Arbitration (ICC). Mexico’s state-owned oil company Petróleos Mexicanos (PEMEX) and Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (COMMISA), a subsidiary of US-based construction company and military contractor KBR, Inc., had engaged in arbitration of a dispute concerning the administrative rescission of certain contracts, and the arbitral tribunal had awarded claimant COMMISA close to $400 million.

In 2010, COMMISA sought and obtained recognition and enforcement of the award in the U.S. District Court, while PEMEX sought the award’s nullification in the Mexican courts and appealed the District Court’s ruling to the U.S. Second Circuit Court of Appeals. After Mexico’s Eleventh Collegiate Court for the Federal District annulled the award (reasoning that as administrative rescissions are matters of public policy, private arbitral tribunals cannot adjudicate on acts of authority), the Second Circuit remanded the case to Judge Hellerstein to address the effect that the Mexican nullification should have on the award and its previous confirmation.  

On remand, the District Court declined to defer to the Mexican court’s decision, and reconfirmed the award. Judge Hellerstein’s opinion examines the relevant provision of the 1975 Inter-American Convention on International Commercial Arbitration (the Panama Convention), article V(1)(e), pursuant to which annulment at the seat of  arbitration is one of five limited grounds for refusing enforcement of a foreign arbitral award (the relevant provisions of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards are virtually identical). The District Court found that article V(1)(e) gave it discretion to refuse enforcement of an annulled award, and in this case reconfirmed the award because the Mexican annulment decision had relied on law and policy not in existence at the time of the parties’ contract. This, according to Judge Hellerstein, “violated basic notions of justice.” Both conventions also allow the courts of contracting states to refuse any recognition or enforcement of an award that would contravene the public policy of the country in which it is sought.  

The District Court’s decision places a spotlight on the ongoing question of the scope of judicial discretion under the New York and Panama Conventions to recognize and enforce arbitral awards annulled at the seat of arbitration. In Chromalloy Aeroservices v. Arab Republic of Egypt (939 F. Supp. 907, 914 (D.D.C. 1996)), the U.S. District Court for the District of Columbia refused to enforce a decision of the Egyptian Court of Appeal that nullified an arbitration award between a U.S. corporation and Egypt. Relying inter alia on U.S. public policy in favor of final and binding arbitration of disputes, the D.C. District Court found the arbitration award valid. By contrast, in Baker Marine v. Chevron (191 F.3d 194, 197 (2d Cir. 1999)) the Second Circuit deferred to a Nigerian court’s set-aside of an arbitration award because the petitioner showed “no adequate reason for refusing to recognize the judgments of the Nigerian court.” Further, in TermoRio v. Electranta (487 F.3d 928, 937, 941 (D.C. Cir. 2007)) the D.C. Circuit honored a Colombian court’s set-aside of an award between two Colombian parties under the Panama Convention, but noted that it was not overruling Chromalloy.  The District Court in COMMISA distinguished its decision from Baker Marine and TermoRio, both of which lacked the "narrow public policy gloss  . . .  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" (citing TermoRio, 487 F.3d at 939).  

Although the issue of a U.S. court’s discretion to enforce annulled awards remains unsettled, the COMMISA decision suggests that at the very least, a U.S. court has discretion to confirm an annulled arbitration award where denying enforcement would be fundamentally unfair and violate basic notions of justice.  

Because of the widespread adoption of the New York Convention (149 parties), courts in other popular arbitral jurisdictions have also been faced with this issue, and have adopted both broad and narrow approaches to reviewing foreign awards annulled at the place of arbitration. In France, courts consider international arbitral awards to be separate from any national legal order, so that annulment by a state court has no bearing on enforcement in another.  France’s broad approach is illustrated in Maximov v. NLMK (Tribunal de grande instance, Paris, May 16, 2012), Hilmarton Ltd. (U.K.) v. Omnium de Traitement et de Valorisation— OTV (France) (Cour de cassation Mar. 23, 1994, 20 Yearbk. Comm. Arb’n 663 (1995)), and Pabalk Ticaret Ltd. Sirketi S.A. (Turkey) v. Norsolor S.A.(France) (Cour de cassation Oct. 9, 1984, 24 I.L.M. 360 (1985)), all of which resulted in French court enforcement of awards annulled at the seat of arbitration. However, in countries like Switzerland, England, and Germany, courts have adopted a narrower approach, and are less likely to enforce foreign awards that courts in the arbitral seat have set aside. In the Netherlands, Dutch courts have assumed an approach similar to that of Judge Hellerstein, and examine whether the fundamental (un)fairness of refusing enforcement offends Dutch notions of public policy. Courts in Japan and Singapore have yet to rule on this issue.  

As a result of the globally inconsistent approach to enforcement, a party interested in enforcing an annulled award should specifically seek to enforce the award in a jurisdiction with a broad approach, like France. Nevertheless, the inconsistency with which courts around the world treat arbitral seat annulments suggests that parties agreeing to arbitrate must choose the arbitral seat wisely, considering among other things the seat’s historical treatment of arbitration awards, and the likelihood of local annulment.  

- Cynthia Galvez, CPR Legal Intern