The Grand Court of the Cayman Islands has refused to enforce a US$55 million ICC award issued a decade ago in favour of a Brazilian airline, finding that two private equity funds that were held liable had not consented to the arbitration.

In a judgment yesterday, Judge Ingrid Mangatal quashed an ex parte order from 2016 that had granted enforcement of the award in favour of Brazil’s VRG Linhas Aéreas against two distressed-debt investment funds managed by New York-based MatlinPatterson (MP).

The judge found that the award offended the principle that arbitration “must be consensual”, as it based its jurisdiction on an arbitration agreement to which the funds were not parties; and had held the funds liable under a provision of Brazilian law that had never been pleaded.

The funds were represented in the Cayman proceedings by Vernon Flynn QC of Essex Court Chambers in London, along with offshore firm Maples and Calder and Simpson Thacher & Bartlett in London. VRG used Thomas Lowe QC of Wilberforce Chambers in London and offshore firm Ogier.

The dispute dates back to 2007, when a subsidiary of Brazilian budget airline Gol purchased VRG for US$320 million from a Brazilian company called Volo, in which the MP funds had a minority stake. The deal was pursuant to a sale agreement that provided for ICC arbitration seated in Säo Paulo. 

The MP funds did not sign the agreement but entered into an addendum with Volo’s Brazilian shareholders in which they agreed to comply with certain non-compete provisions.

VRG, which by this time had merged with the Gol entity and become its successor under the sale agreement, filed for arbitration against Volo later that year. It invoked a mechanism in the agreement that allowed for a purchase price adjustment to reflect changes in the airline’s working capital. VRG also named the MP funds as respondents, arguing that they were the alter egos of the sellers and that the corporate veil should therefore be lifted.

In a partial award in 2009, Spanish tribunal chair Juan Fernández–Armesto formed a majority with Brazilian arbitrator Gustavo Tepedino in rejecting the MP funds’ jurisdictional objections, concluding that they were bound by the arbitration clause in the sale agreement by virtue of having signed the non-compete letter. Brazilian co-arbitrator Pedro Batista Martins issued a dissenting opinion.

The tribunal issued a final award in the following year, holding Volo and the MP funds jointly liable for the entire purchase price adjustment, which it calculated at US$55 million. Although the tribunal rejected VRG’s claim that the funds were alter egos of the sellers, it found them liable on the basis of a tort in the Brazilian Civil Code known as “third party malice”.

The award has been upheld by the lower Brazilian courts at the seat of arbitration but an appeal by the funds is pending with the special chamber of the country’s Superior Court of Justice.

The US courts have meanwhile refused to enforce the award. In 2011, the US District Court for the Southern District of New York refused VRG’s enforcement application on the basis that, even if one assumed for the sake of argument that the funds had consented to arbitration in the addendum, they only agreed to arbitrate disputes over their non-compete undertaking and not disputes under the sale agreement.

The Second Circuit overturned that decision and remanded the case to the district court in 2013, asking it to determine whether the MP funds were in fact parties to the arbitration clause in the sale agreement. A year later the district court ruled that the funds had not consented to be bound by that clause. The Second Circuit later upheld that ruling and refused to grant VRG an en banc rehearing.

The Cayman court granted VRG an ex parte order for enforcement of the award in October 2016, concluding that the airline had a good prima facie case.

In the latest proceedings, the Cayman court heard oral evidence on behalf of the funds from Brazilian-US national Mauricio Gomm Santos, partner at GST in Miami, while Pinheiro Neto partner Gilberto Giusti in São Paulo and Brazilian arbitrator and academic Carlos Alberto Carmona gave testimony on behalf of VRG.

In her decision, Judge Mangatal concluded that the funds were intentionally, and as a matter of objective construction, not parties to the sale agreement. The non-compete addendum did not contain or incorporate any arbitration agreement that could cover the price adjustment dispute either, she found.   

The decision of the ICC tribunal to find the funds liable for breaching a provision of Brazilian law that had never been pleaded in the arbitration had denied the funds their right to be heard on the issue “in breach of natural justice”, she ruled.  

She also rejected VRG’s arguments that she was bound by the findings of the Brazilian courts under the principle of issue estoppel. She found that the Brazilian decisions rendered thus far were plainly not final and conclusive under Brazilian law, and that the issues in the two sets of proceedings were not identical and “not even materially or substantially the same”.

In the arbitration, the MP funds’ were represented by Brazilian firms Teixeira Martins Advogados and Veirano Advogados. The Veirano team was led by former partner Pedro Soares Maciel, who left to join Lefosse Advogados in 2015 and submitted written evidence in the Cayman proceedings.

VRG was represented in the ICC case by Mattos Filho Veiga Filho Marrey Jr and Quiroga.

In the Grand Court of the Cayman Islands

  • Judge Ingrid Mangatal

Counsel to Matlin Patterson Global Opportunities Partners (Cayman) II LP, Matlin Patterson Global Opportunities Partners II LP and Matlin Patterson Partners II LLC

  • Vernon Flynn QC and Emily Wood of Essex Court Chambers in London  
  • Maples and Calder

Partner Luke Stockdale in Cayman Islands

  • Simpson Thacher & Bartlett LLP

Partners Tyler Robinson  and associate Lauren Brazier in London

Counsel to VRG Linhas Aéreas

  • Thomas Lowe QC of Wilberforce Chambers in London
  • Ogier

Partners Ulrich Payne and Shaun Maloney in Cayman Islands

Witnesses for the funds

  • Pedro Soares Maciel of Lefosse Advogados
  • Mauricio Gomm Santos, partner at GST in Miami

Witnesses for VRG

  • Pinheiro Neto partner Gilberto Giusti in São Paulo
  • Brazilian arbitrator and academic Carlos Alberto Carmona

Before the US District Court for the Southern District of New York

Counsel to VRG Linhas Aéreas

  • Debevoise & Plimpton

Partner Donald Donovan, counsel Carl Micarelli and associate Amanda Zakowich in New York

  • Quinn Emanuel Urquhart & Sullivan

Partner Richard Werder in New York

Counsel to Matlin Patterson funds

  • Simpson Thacher & Bartlett LLP

Partners Tyler Robinson in London and Robert Smit in New York, and associates Michelle Hertz and Joshua Slocum in New York

In the ICC arbitration

Tribunal

  • Juan Fernández–Armesto (Spain)
  • Pedro Batista Martins (Brazil)
  • Gustavo Tepedino (Brazil)

Counsel to VRG Linhas Aéreas

  • Mattos Filho Veiga Filho Marrey Jr and Quiroga

Partners Flávio Periera Lima in São Paulo and Daniel Calhman de Miranda in New York

Counsel to Matlin Patterson funds

  • Veirano Avogados

Partner Pedro Soares Maciel and associates Mateus Aimore and Alfred Habib Siouf Filho in São Paulo

  • Teixeira Martins Advogados

Cristiano Zanin Martins in São Paulo

This article was originally published on Global Arbitration Review, the leading resource on international arbitration news and community intelligence. Subscribe now.