Author: Ramkrishna Veerendra*
| Jurisdictions: | Topics: |
The case Comissa v. PEMEX from the U.S. Court of Appeals, Second Circuit deals with the extent to which courts enjoy discretion when deciding on a motion for enforcement of an international arbitration award to either grant or refuse enforcement when the award in question has been set aside by the court at the country of the award’s origin. Such judicial discretion is prima facie authorized by the expression “may” under Article 5(1)(e) of the Inter-American Convention on International Commercial Arbitration, 1975 (“Panama Convention”), and it is exercised in light of the public policy of the state where enforcement is sought, i.e., the U.S.
RELEVANT FACTS
I. The Parties
Petitioner: Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (“COMMISA”), a subsidiary of K.B.R. Inc., a U.S. construction and military contracting Company.
Respondent: PEMEX – Exploración y Producción (“P.E.P.”) was a subsidiary of Petróleos Mexicanos (“PEMEX”), a Mexican oil and gas company.
Both P.E.P. and PEMEX are Mexican State entities that can independently own property and carry out business under their own names.
In October 1997, COMMISA and P.E.P. entered into a contract (“Contract”) for COMMISA to build oil platforms in the Gulf of Mexico (“Project”). Article 23.3 of the contract contains an arbitration clause. Another clause gave P.E.P. the unilateral right to “Administrative Rescission” if COMMISA breached the contract or abandoned its work.
II. History of Proceedings
| Date | Event |
| 1997 – 2004 | Disputes arose between the parties to the contract. |
| March 2004 | P.E.P. gave notice of its intent to administratively rescind the contract alleging COMMISA’s failure to meet contractual milestones and abandonment of the Project. |
| December 2004 | COMMISA filed a demand for arbitration with the International Court of Arbitration. |
| December 2005 | Arbitration proceedings commenced, culminating in a preliminary award by the arbitration panel, which affirmed its jurisdiction over the dispute (November 2006). |
|
December 7, 2007 – December 16, 2009 |
During the pendency of the arbitration, Mexico passed two laws that directly affected the dispute. Those laws:
(i) Gave exclusive jurisdiction to Mexico’s tax court over claims relating to public contracts; and (ii) Provided that a state-owned entity’s decision to exercise rights of “administrative rescission,” the very claim at issue in the arbitration, was not subject to arbitration.[1] |
| December 2009 | Arbitral Tribunal issued the final award finding that P.E.P. breached the contracts and awarded $300 million as compensation to COMMISA. |
| November 2, 2010 | The U.S. District Court for the Southern District of New York (hereinafter “District Court”) confirmed the award as sought by COMMISA. P.E.P. appealed against the District Court’s order to the United States Court of Appeals for the Second Circuit (hereinafter the “Court of Appeals”). |
| September 21, 2011 | P.E.P. sought vacatur of the award in Mexico, and the Eleventh Collegiate Court for the Federal District (hereinafter the “Mexican Court”) annulled the Final Award ruling that COMISSA’s claims were not arbitrable under the newly introduced laws referred to above. |
| The Court of Appeals, in view of the annulment, remanded the matter to the District Court to consider the effect of the award’s annulment on its enforcement. | |
| August 27, 2013 | The District Court again granted enforcement, observing that under the expression “may” in Article 5(1)(e) of the Panama Convention, it had discretion (albeit narrow[2]) not to defer to a foreign annulment decision when that decision violated basic notions of justice[3]. The Court refused to follow the Mexican annulment decision, instead holding the retrospective application of newly enacted Mexican laws as violating basic notions of justice, for they left COMMISA without any apparent ability to litigate its claims[4].
P.E.P. appealed thereagainst to the Court of Appeals. |
| August 2, 2016 | Rejecting P.E.P.’s preliminary objections, the Court of Appeals held that P.E.P. had waived its right to contest personal jurisdiction owing to its conduct in the proceedings. Further, emphasizing P.E.P.’s contention that it was “functionally the Mexican government,” the Court noted that P.E.P. was effectively an alter ego of the Mexican State and was accordingly not entitled to due process protection, unlike a state-owned foreign enterprise[5].
On merits, the Court observed that under Article 5(1)(e) of the Panama Convention, courts had the discretion to enforce an award annulled in its country of origin but cautioned that such discretion was “constrained by the prudential concern of international comity.”[6] It observed that a foreign judgment is generally conclusive unless enforcement offended the enforcing State’s public policy.[7]
The Court accordingly affirmed the District Court’s decision not to defer to the Mexican Court’s judgment, holding that P.E.P.’s claim of sovereign immunity shattered COMMISA’s investment-backed expectations, retroactive application of newly introduced laws was repugnant to U.S. public policy as it left COMMISA with no forum for its claims which was imperative and amounted to uncompensated governmental expropriation which constituted unconstitutional taking in the U.S. |
COMMENT
For reasons that follow, discussed in seriatim, the author disagrees with the conclusion arrived at by the Court of Appeals as regards the scope of discretion available under Article 5(1)(e) Panama Convention as also the reasoning adopted by the Court in reaching its conclusion. The disagreement is limited to the Court’s discretion findings, and does not extend to the Court’s findings on due process and personal jurisdiction.
Since the provisions of Section 5(1)(e) of the Convention are in pari materia to Article V(1)(e) and VI(2)(b) of the New York Convention, interpretations ascribed to Articles V(1)(e) and VI(2)(b) of New York Convention are attributable to the corresponding Articles 5(1)(e) and 6(2)(b) of the Panama Convention.
I. An award annulled by Seat Court ceases to exist and should not be recognized elsewhere.
The exclusive source of jurisdiction of international arbitration is to be found in the legal order of the seat. In all other legal orders, this has the immediate consequence of making it impossible to enforce awards set aside at the seat. This is premised on the view that an award set aside at the seat ceases to exist. It cannot therefore be recognized anywhere else[7]. An implementation of this theory can be located in the judgment of the Singapore Court of Appeal[8], whereby the Court held that a successful application to annul an arbitral award had an erga omnes [owed toward all] effect. Axiomatically, there would simply be no award to enforce, an award that is ex nihilo nihil fit [nothing comes from nothing].
Pieter Sanders’ remarks further this position that once an award is annulled, Courts will refuse enforcement because there no longer exists any award, and enforcing a non-existent award is impossible and might even contravene the public policy of the enforcing State[9].
One pitfall in drawing discretion from the expression “may” in Article 5(1) is that it results in what is known as a “stateless award,” [10] which is not anchored in the seat. According to Ray Goode, such an award fails to respect the doctrine of estoppel. According to Goode, the decision of the seat Court should be respected everywhere else,[11] and a party that failed to challenge an award at the seat should not be allowed “a second, third or fourth bite at the cherry” before other courts.[12]
Following this reasoning, the District Court could not have enforced a “non-existent” award once it had been set aside by the Mexican Court, which was the Court at the seat of the arbitration.
II. The Court reviewed the judgment of the Mexican Court and not the award itself, which is an impermissible absent express provision in the Panama Convention.
The Court of Appeals, in terms of Article 5(1)(e), analyzed not the award per se but the setting aside of the decision of the Mexican Court. The Panama Convention nowhere provides for examining the Seat Court’s decision. It is only the award that must be examined. The Court in TermoRio S.A. E.S.P. v. Electranta S.P[13] acknowledged the exclusive jurisdiction of the Seat Court by observing that “[a]n arbitration award does not exist to be enforced in other Contracting States if it has been lawfully “set aside” by a competent authority in the State in which the award was made. This principle controls the disposition of this case.”[14] However, even in this case, the Court proceeded to examine only the decision of the Colombian Court therein annulling the award.
It is not easy to appreciate this approach. Once the Courts have observed the award as being non-existent, would it not contravene the United States’ public policy to enforce a non-existent award? A possible defense to this argument could be that the award is non-existent only when setting aside is “lawful.” However, the problem with this reasoning is that it conveys that the award must meet some other criteria for setting aside beyond that prescribed by the Convention, which is an impermissible and unjustified super-imposition.
III. The enforcing Court cannot second-guess the Seat Court’s decision.
The Court of Appeals took note of TermoRio, which states that the Convention does not endorse a regime in which a secondary (enforcing) State routinely second-guesses the judgment of the primary (seat) State when the latter has acted lawfully pursuant to the competent authority to set aside the award[15].
In the instant case, it was neither disputed that the award had been annulled lawfully and by a competent authority. Despite this, the Court examined the award against the above precedent.
Relying on Baker Marine (Nig.) Ltd. v. Chevron (Nig.) Ltd.[16], the Court in TermoRio cautioned that Courts in the United States do not have “unfettered discretion” to impose their public policy considerations in reviewing decisions of the seat Court vacating an award based upon the foreign Court’s construction of the law of the seat[17].
Furthermore, the contract herein was governed by Mexican Law, with Mexico City being the seat. The contract did not provide that the parties intended to be bound by the United States’ domestic arbitral law. The Mexican Court applied Mexican law to adjudicate the award’s validity. The Court of Appeals was hence in no position to pronounce the correctness of the Mexican Court’s decision.
IV. The Seat Court can sua sponte inquire into the award’s validity, which indicates the absence of discretion.
Under Article 5(1) of the Panama Convention, the grounds are limited in that recognition and enforcement would be refused only when the defendant invokes the enumerated ground(s). However, Article 5(1)(e) holds a relatively unique place. After all, as Peiter Sanders opines[18] (in the context of Article V(1)(e) New York Convention), even if the defendant does not raise this ground, the Courts will nevertheless refuse enforcement because there no longer exists an award for enforcement. This conveys that since powers under 5(1)(e) can be exercised sua sponte, the provision confers upon the Court a duty to ensure that the award is valid, regardless of the parties’ invocation.
Further, as noted by Albert Jan van den Berg[19], Article V(1)(e) as a ground for refusal “seldom occurs and is almost never successful.” The standard for setting aside an award is, indubitably, very high. A court may refuse to set aside an award “only” upon proof of the enumerated conditions. It therefore follows that since setting aside is so rare and daunting a standard to meet, the fact that an award, upon consideration of the evidence on record, has been set aside by the Seat Court particularly one interpreting its own arbitral law as well as the law of the underlying/container contract, both laws being the same (in this case, Mexican law), the enforcing Court must pay due deference this high standard having been met by the Courts at the seat and accordingly, refuse enforcement. It is unlikely that the residual discretion under the expression “may” extends to awards set aside by the Seat Court[20]. No interference by the enforcing Court would be justified in light of this high standard set by the Convention.
V. The judgment is contrary to the spirit and intention of the Panama Convention as it resuscitates the “Double Exequator” requirement.
The New York Convention Article V(1)(e) invites the enforcing Court to reason directly on the award. By ruling on the judgment of the seat Court, the U.S. Courts have re-introduced the now abolished double exequatur standard for enforcement, which proceeded on the notion that the award had no binding character unless it was submitted for validation in the legal order of the seat.[21] This approach leads to a two-tier control system- first, a review of the award by the Seat Court and second, a subsequent review of the Seat Court’s decision by the enforcing Court.[22] This militates against the New York Convention’s and Panama Convention’s objects containing virtually identical provisions.
There is a further objection to this methodology—party autonomy in international arbitration law is supreme. It manifests in the parties’ choice of law to govern the contract, the arbitration process (Lex arbitri, or the applicable arbitral law), the arbitration agreement, and also the “Seat” of the arbitration. By designating Lex arbitri, the parties also embrace the possibility of annulment of the award by the Seat Court. The choice of law is to be upheld and substantially ensures clarity of process and outcome. In most cases, the parties do not know where enforcement will be sought beforehand. The enforcement proceedings subject the award and the parties to a jurisdiction that, in most cases, is not known to them till after the award has been made. Consequently, the fate of the award is ultimately determined by a law that is not known to the parties and, quite obviously, is not chosen by them. It resultantly acquires even greater significance than the express choice of the parties.
If, in such a situation, the Court in the enforcing jurisdiction were to exercise undefined discretion while reviewing a well-reasoned decision of the Seat Court, it would do violence to party autonomy, which is fundamental to international arbitration law. Such discretion, therefore, cannot be inferred from the Convention if not expressly provided.
VI. The Court cannot cite “extraordinary” circumstances as a reason for ignoring a foreign judgment on the grounds of public policy.
The Court of Appeals relied on Baker Marine to justify ignoring the annulment decision of the Mexican Court, citing “rare/extraordinary” circumstances which made the decision unenforceable as per U.S. public policy. This standard of “extraordinary” circumstances is not provided in the Panama Convention. Reading it into the Convention as a part of public policy exception would amount to excessive judicial law-making. It effectively confers limitless discretion upon the Court, which in turn unjustifiably widens the scope of “public policy” in Article 6(2)(b) to dangerous lengths.
As explained by Sanders, the New York Conference of 1958 wanted to limit the scope of the public policy clause “as far as possible” and hence did not add next to “public policy” references to “the principles of law” as found in the Geneva Convention or “fundamental principles of law.” This was done to curtail the scope of judicial interference due to alleged violations of public policy. A similar restraint should be placed on the standard of “fundamental notions of what is decent and just,” which the Court read as qualifying public policy.
The TermoRio Court noted that the test of public policy could not be simply whether the courts of the enforcing State would annul an arbitration award if it had been made and enforcement had been sought within its jurisdiction,[23] which is precisely what the Court herein has done while applying the public policy exception.
The award could not have been enforced even relying upon U.S. domestic arbitral law.
Rather than applying the “rare/extraordinary circumstances” test (which has since not been followed by the U.S. Courts), the Court could have applied the Panama Convention equivalent of Article VII(1) New York Convention, which allows a party to avail itself of an award in accordance with its domestic arbitral laws (more-favorable-right). However, the Panama Convention has no equivalent provision. Hence, US Courts herein could not have justified enforcement even in accordance with their domestic arbitral laws.
CONCLUSION
The Court of Appeals therefore erred in its decision. Interpreting the expression “may” as imbuing very liberal discretionary powers upon the Court violates the Convention’s objective, namely, enforcement of “valid” awards. Such interpretation leaves hardly any reasonable ground to justify refusing enforcement of an award that certainly was not or could have been the Convention’s intent and object.
[1] Commisa v. Pemex: Second Circuit Confirms Arbitration Award Vacated At Its Seat | Chaffetz Lindsey LLP.
[2] This approach is hence distinguished from French approach in The Arab Republic of Egypt v. Chromalloy Aeroservices Inc. (Paris Court of Appeal, January 14, 1997), which recognizes absolute authority qua enforcement despite setting aside.
[3] Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. Pemex Exploración y Producción, United States Court of Appeals, Second Circuit, Docket No. 13 4022, 2 August 2016, 2.
[4] Ibid. at 6, para. 20.
[5] Supra Note 3, at 8, para. 43.
[6] Ibid. at 9, para. 40, 42
[7] Emmanuel Gaillard, Legal Theory of International Arbitration 135 (2010).
[8] PT First Media TBK v. Astro Nusantara International BV and others [2013] SGCA 57 at para. 76, 77.
[9] Pieter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 6 Netherlands International Law Review 109–110 (1955).
[10] Roy Goode, The Role of the Lex Loci Arbitri in International Commercial Arbitration, 17 Arbitration International 35 (2001).
[11] Supra Note 7 at 145, para. 130.
[12] Supra Note 10 at 35.
[13] Termorio v. Electranta, 487 F.3d 928, 938 (D.C. Cir. 2007).
[14] Ibid. at 14.
[15] Ibid. at 17–18.
[16] Baker Marine, Ltd. v. Chevron, Ltd., 191 F.3d 194, 197 n. 3 (2d Cir. 1999).
[17] Supra Note 13, at 18.
[18] Supra Note 9, at 109–110.
[19] Albert Jan van den Berg, The New York Arbitration Convention Of 1958: Towards A Uniform Judicial Interpretation 332 (1981).
[20] Albert Jan van den Berg, Enforcement of Annulled Awards, 9/N 2 ICC International Court of Arbitration Bulletin 18 (1998).
[21] Supra Note 7 at 146–147, para. 131.
[22] Supra Note 7 at 148, para. 132.
[23] Supra Note 13, at 18.
* Ramkrishna Veerendra has recently completed his LL.M. in International Arbitration and Dispute Resolution from the National University of Singapore. He has worked as a Law Clerk in the High Court of Delhi, India, and thereafter as a Disputes lawyer representing clients in arbitration and civil and commercial litigation matters before various arbitral tribunals and Courts in India.