Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploración Y Producción, No. 13-4022 (2d Cir. Aug. 2, 2016) [click for opinion]

The underlying dispute arose out of a 1997 contract to build oil platforms in the Gulf of Mexico between Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. ("COMMISA"), a Mexican subsidiary of a U.S. construction company, and Pemex-Exploración Y Producción ("PEP"), a subsidiary of Petroleos Mexicanos ("PEMEX"), the state oil and gas company for Mexico. The contract was governed by Mexican law and included a broad arbitration clause providing for ICC arbitration seated in Mexico City.

After disputes arose, COMMISA commenced arbitration in Mexico in 2004. PEP then informed COMMISA that it had administratively rescinded the contract, an action that survived a challenge in Mexican courts. In 2009, however, the arbitral tribunal found that PEP breached the contracts and issued a Final Award granting COMMISA approximately US$300 million in damages.

COMMISA successfully confirmed the award in the U.S. District Court for the Southern District of New York in August 2010. PEP appealed and simultaneously challenged the arbitral award in the Mexican courts. In September 2011, the Mexican courts held that PEP's rescission was not arbitrable and annulled the award. The Mexican court decision relied in part on legislation passed in 2007, after the parties' dispute arose, requiring that claims related to public contracts be decided exclusively in the Mexican Tax and Administrative Court and severely curtailing the statute of limitations from ten years to 45 days.

PEP then successfully moved, in the Second Circuit, for vacatur and remand for the district court to consider the effect of the Mexican court's decision. On remand, the district court declined to defer to the Mexican court's annulment decision and again confirmed the award, finding that annulment based on retroactive application of the 2007 law violated basic notions of justice and left COMMISA without a remedy. PEP appealed again.

On appeal, PEP first raised threshold objections to personal jurisdiction and venue in the district court. A majority of the Second Circuit rejected both arguments, reasoning sua sponte that PEP forfeited its objections to personal jurisdiction and venue by affirmatively seeking relief from the court via PEP's request for remand to the district court for a new merits determination, and because the jurisdictional protections of the due process clause do not apply to foreign sovereigns.

The Second Circuit next considered PEP's argument that the district court abused its discretion in confirming the annulled arbitration award. Enforcement of the award was governed by Article V of the Inter-American Convention on International Commercial Arbitration (the "Panama Convention"), which provides a district court with discretion to refuse recognition of an award only if a litigant establishes one of seven defenses. Here, the district court had that discretion under Article V(1)(e) of the Panama Convention, allowing refusal of recognition where the "award . . . has been [annulled] or suspended by a competent authority of the State in which, or under the law of which, that award was made."

However, the Second Circuit held that this discretion is not unfettered, but is "constrained by the prudential concern of international comity." Accordingly, a foreign court judgment is generally conclusive unless its enforcement would offend the public policy of the state where enforcement is sought. Noting that the public policy exception was a "high, and infrequently met" bar, the Second Circuit held that the Panama Convention affords a district court discretion to enforce a foreign arbitral award annulled at the seat "only to vindicate fundamental notions of what is decent and just in the United States."

Applying that standard, the Second Circuit found the "high hurdle" of the public policy exception was surmounted in this case by four considerations: (1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.

First, Mexican law specifically authorized PEP to enter into arbitration agreements at the time the dispute arose, and PEP participated in the arbitration without contesting the arbitrability of its administrative rescission. The Second Circuit noted that such contractual waivers of sovereign immunity are enforced under domestic law, and are likewise embodied in the North American Free Trade Agreement ("NAFTA"). Thus, the Second Circuit considered that allowing a post-hoc claim of sovereign immunity would destroy COMMISA's investment-backed contractual expectations. Second, the court found that giving effect to the nullification would impair the deeply-rooted principle that retroactive legislation canceling contract rights is repugnant to U.S. law. The Second Circuit was not confined by the Mexican court's express statement that it wasnot retroactively applying the 2007 legislation, because the Second Circuit found there was a retroactive application "as a matter of United Stateslaw." Third, the Second Circuit held that implementing the nullification would deprive COMMISA of a sure forum in which to bring its contract claims, since the Mexican courts had already indicated that a breach of contract suit would be barred by the new statute of limitations and by res judicata principles. Fourth, the court considered that PEP's rescission of the contracts combined with the Mexican court's retroactive enforcement of new legislation to frustrate relief granted to COMMISA by the arbitral tribunal amounted to an unconstitutional taking under U.S. law.

The Second Circuit concluded that these "rare circumstances" validated the district court's exercise of discretion to confirm the arbitral award despite its nullification in Mexico, because "to do otherwise would undermine public confidence in laws and diminish rights of personal liberty and property." It cautioned, however, that courts in this position should act with trepidation and reluctance, and should not ordinarily second-guess matters of foreign law decided by a foreign court.