In a recent decision, Corporación Mexicana de Matenimiento Integral, S De RL De CV v Pemex-Exploración y Producción, No 13-4022 (2d Cir Aug 2, 2016), the US Court of Appeals for the Second Circuit ("Second Circuit") has affirmed a 2013 decision by the US District Court for the Southern District of New York ("Southern District"), which recognised and enforced an arbitral award for a Mexican subsidiary, Corporación Mexicana de Matenimiento Integral, S De RL De CV ("Commisa"), of the US-based company KBR against the Mexican state oil and gas company, Pemex.

Facts

The award was rendered out of an International Chamber of Commerce ("ICC") arbitration arising out of a contract to build offshore oil platforms in the Gulf of Mexico between Commisa and Pemex-Exploración y Producción ("PEP"), a subsidiary of Pemex. When a dispute arose, Commisa initiated an ICC arbitration seated in Mexico City and governed by Mexican law, for breach of contract. After Commisa commenced the arbitration, PEP purported to rescind the contract. Commisa sought to challenge the rescission in local courts, and when those efforts failed, it sought damages for wrongful termination in the pending arbitration. The arbitral tribunal found PEP liable for the wrongful termination of the contract and ordered PEP to pay Commisa US$300m in damages. Notably, during the arbitration, the tribunal issued an interim award finding that it had jurisdiction to hear the case. Pemex did not challenge that decision or raise the issue of arbitrability, even though Mexican law allowed for the interim award to be appealed.

Subsequently, Commisa petitioned the Southern District for confirmation of the award, which was granted. In turn, PEP appealed the Southern District's judgment to the Second Circuit ("First Appeal") and simultaneously attacked the arbitral award in the Mexican courts. In Mexico, the court set aside the arbitral award on the ground that PEP, as an entity deemed part of the Mexican government, could not be forced to arbitrate. This was because whilst arbitration was pending, Mexico enacted the Law of Public Works and Related Services, which under section 98, precluded the arbitration of administrative rescission of contracts. This law had not been in force at the time the contract was executed or rescinded.

Armed with that decision, PEP moved in the Second Circuit to vacate the Southern District's judgment and remit the First Appeal to the Southern District for judicial review in light of the Mexican court's decision. The Second Circuit granted that motion.

Southern District's decision

The question faced by the Southern District was whether it could and should confirm the award despite the fact that it had been set aside by a court at the seat of arbitration. This arose in the of the Inter-American Convention on International Commercial Arbitration ("Panama Convention"), which applies between the members of the Organisation of American States (OAS). Similar to the New York Convention, the Panama Convention provides for the recognition and enforcement of arbitration agreements and foreign arbitral awards in the courts of its signatories. Under Article 5(1) of the Panama Convention, courts "may" refuse recognition and enforcement if the award "has been set aside or suspended by a competent authority in the country in which, or under the law of which, that award was made". After reconsideration, the Southern District adhered to its previous ruling, issued a new judgement confirming the arbitral award, and thus set the stage for the present appeal.

Second Circuit's decision

Finding that the Southern District properly exercised its discretion in confirming the award, the Second Circuit held that giving effect to the nullification in Mexico "would run counter to United States public policy" and would "be repugnant to fundamental notions of what is decent and just in this country".

In addressing whether the Southern District had the authority to recognise an annulled award, the Second Circuit agreed with the Southern District that the word "may" in Article V of the Panama Convention meant that it had discretion to recognise and enforce an award even if it had been annulled in the seat of arbitration. The Second Court did note, however, that "discretion is constrained by the prudential concern of international comity" and it is appropriate only to vindicate "fundamental notions of what is decent and just in the United States".

In this case, the Second Circuit found that the "high hurdle of the public policy exception" was surmounted here by four main considerations:

  • Pemex had waived any jurisdictional argument based on questions of arbitrability by failing to challenge the interim award in which the arbitrators held that they had jurisdiction to hear the case;

  • the repugnancy of applying retroactive legislation that unfairly disrupts contractual expectations;

  • the "imperative of having cases heard somewhere" and ensuring they find a forum; and

  • the prohibition against government expropriation without compensation.

Conclusion

Given the high threshold used by the Second Circuit in it decision making, it remains likely that US courts will exercise the discretion to enforce a foreign arbitral award annulled at the arbitral seat with caution. Nevertheless, this case proves that it is not an insurmountable task.