The annulment of a final arbitration award by a Mexican court has become a highly controversial issue, as it may set a negative precedent in the Mexican courts and could have repercussions at international level.
The dispute involves Pemex Exploración y Producción, the government agency with responsibility for oil production in Mexico, and Corporación Mexicana de Mantenimiento Integral (COMISSA), an offshore oil platform construction company. Since the administrative rescission of COMISSA's contract with Pemex in March 2004, the parties have been entrenched in a legal battle that has so far included International Chamber of Commerce (ICC) arbitration and proceedings before the Mexican and US courts. The latest twist came when a Mexican district court found in favour of Pemex and ruled that public policy in Mexico allows government agencies to terminate a binding contract unilaterally, thereby rendering ineffective any contractual agreement to arbitrate. Therefore, the arbitral tribunal's final decision, which had awarded COMISSA approximately $400 million in damages against Pemex, was declared null and void on the grounds of lack of jurisdiction.
Dispute
In 1997 COMISSA entered into an agreement with Pemex in relation to the construction of two oil platforms. The contract provided for ICC arbitration in the event of a dispute.
In 2004 Pemex unilaterally terminated the contract without compensation. At that point, COMISSA had completed 94% of the work. COMISSA commenced ICC arbitration proceedings against Pemex, seeking damages in respect of Pemex's termination of the contract.
After the termination of the contract, Pemex filed a claim with COMISSA's bonding company to obtain $80 million from the performance bonds that COMISSA had provided. As permitted by the ICC Arbitration Rules, COMISSA sought an order from a Mexican court to prevent Pemex from withdrawing the bonds. In 2006 the Supreme Court held Pemex's termination of the contract to have been legal. It dismissed the injunction and stated that COMISSA had the right to seek damages through ordinary proceedings, including arbitration proceedings. At that point, the ICC arbitration hearing and final award were still pending.
Significantly, under the ICC rules and under Mexican law, the interim judicial measures sought by COMISSA did not preclude its right to arbitrate; nor did they imply that COMISSA had waived its right to arbitrate the dispute.
In 2009 the arbitral tribunal issued its final award, granting COMISSA approximately $400 million in damages against Pemex. COMISSA immediately filed an action before the US District Court for the Southern District of New York for the recognition and enforcement of the award. In 2010 the court confirmed the ICC award. Pemex appealed the decision before the US Court of Appeals for the Second Circuit.
Pemex subsequently sought annulment of the arbitral award before a Mexican district court, which dismissed the application for lack of jurisdiction and directed Pemex to file the same motion before a different district court with the relevant jurisdiction. Pemex's motion was also dismissed as being without merit. In respect of this decision, Pemex filed an amparo indirecto - an injunctive remedy on the basis of constitutional rights - before the Tenth Civil District Court. The court subsequently dismissed the amparo filing and confirmed the validity and enforceability of the award.
The central argument of each motion brought by Pemex was that as a result of the termination of the contract, the arbitration clause was rendered invalid, thus leaving the ICC tribunal without jurisdiction over the dispute.
Pemex continued to seek annulment of the award. Finally, on September 21 2011 the Eleventh Collegiate Court annulled the ICC award on the grounds that the termination of an agreement by a government agency implies the revocation of the agency's consent to arbitrate and therefore nullifies an agreement to do so. As such, the arbitral tribunal is left without jurisdiction.
Pemex filed a motion before the US Court of Appeals for the Second Circuit, seeking dismissal of the arbitral award on the grounds that it had been nullified by a Mexican court.
On October 25 2011 the Mexican Fifth District Court confirmed the nullification of the award, declaring on the grounds of public policy that Mexican government agencies, such as Pemex, can unilaterally terminate contracts, thereby rendering invalid any arbitration clauses therein.
The Mexican court decisions in this dispute have sparked debate about numerous issues in connection with arbitration and contractual obligations.
For instance, the resolution issued by the Fifth District Court grants public entities the authority to terminate contracts unilaterally. However, this resolution not only affects COMISSA, but also impairs the fundamental sanctity of contract law - the termination of an agreement should not result in the invalidation of the provisions established therein, either as a matter of fact or as a matter of law.
It is a point of international principle that a valid contract is binding on the parties, and that consent to a contract represents an obligation to honour the obligations established thereby. Failure to fulfil its provisions implies a breach of contract and a contravention of the general principle of good faith.
The Mexican court rulings will generate legal uncertainty at an international level, as foreign entities will be unable to rely on arbitral agreements being respected by government agencies. From this perspective, the rulings could prove economically damaging; they may affect future and current investments as a result of the lack of legal commitment and security that government agencies may be seen to offer.
Mexico has ratified the New York and Panama Conventions, which confirm the recognition and enforcement of written arbitration agreements and arbitral awards. In addition, these conventions do not grant any jurisdiction the absolute discretion to annul an award unilaterally or to disregard an arbitration proceeding, as the Mexican courts have done. As such, the Mexican courts' rulings are unfounded.
For further information on this topic please contact Luis Alberto Aziz Checa or Rebeca Sanchez Perez at SAI Law & Economics by telephone (+52 55 59 85 6618), fax (+52 55 59 85 6628) or email ([email protected] or [email protected]).