Two years after its noted decision enforcing an annulled award in the Pemex case, the Second Circuit again took up the issue of enforcement of an annulled award. This time, noting different facts, the Second Circuit affirmed a District Court’s decision to not enforce an annulled award that had been annulled after the original judgment of confirmation. The circumstances of this case are unique: The award was originally enforced in two secondary jurisdictions (the U.S. and the U.K), while enforcement was denied in a third (France). After this was concluded, the award was annulled by the primary jurisdiction (Malaysia).
Thai Lao Lignite Co., Ltd. (“TLL”) and its subsidiary, Hongsa Lignite (Lao PDR) Co., Ltd. (“HLL”), initiated arbitration pursuant to the UNCITRAL Rules against the Government of the Lao People’s Democratic Republic (“Laos”). The case arose out of a series of mining contracts and a power generation project initiated in the 1990s, to be performed in the northern Hongsa region of Laos. The contracts provided for HLL to mine lignite then sell energy to Thailand. However, due to financing issues and impacts of the Asian Financial Crisis (from 1997 – 2000), only some preparatory work and surveying was completed. Laos sent TLL a notice of default in September 2006, and terminated the contracts shortly thereafter. TLL and HLL initiated arbitral proceedings in June 2007.
An award for $57 million was rendered in Malaysia in November 2009, in favor of TLL and HLL. After the term for applications to set aside the award under Malaysian law had passed, the claimants sought to enforce the award in the U.S., the U.K. and France. Initially, the claimants succeeded in all three jurisdictions. Later, the French Court of Appeal of Paris overturned the trial level decision to enforce because it found that the arbitrators ruled on matters outside the scope of the arbitration agreement. The U.S. District Court proceeding was similarly appealed by Laos, however the Second Circuit affirmed the decision to enforce the award (July 2012). In the U.K., the High Court of Justice of England and Wales entered judgment enforcing the award, relying heavily on the U.S. District Court’s determination to do so (November 2012). At this stage, two secondary jurisdictions had enforced the award, and one had denied enforcement.
During these enforcement proceedings, in October 2010, Laos initiated set aside proceedings at the seat in Malaysia. Despite expiry of the time to challenge the award, Laos applied to the court for an extension due to its “lack of knowledge of the local law and inadequate advice from its legal advisors.” The trial court initially denied Laos’ request, but on appeal the request was granted. The Court of Appeal of Malaysia found that a sovereign should be given special treatment, noting that to “refuse the extension of time would be tantamount to shutting out the Government of Laos from challenging the award.”
In December 2012, the Malaysian High Court annulled the award and ordered the parties to re-arbitrate their claims. It reasoned that the arbitral tribunal had exceeded its jurisdiction by addressing claims under the mining contracts, to which HLL was not party. With the Malaysian annulment decision in hand, Laos moved the U.S. District Court to vacate its August 2011 judgment pursuant to Federal Rule of Civil Procedure (“FRCP) 60(b)(5). The District Court granted Laos’s motion and vacated its earlier judgment (February 2014).
On appeal, the Second Circuit reviewed the decision for abuse of discretion by the District Court because the judgement “rested on a decision to extend or deny comity to the courts of a foreign sovereign.” In other words, because the foreign court had annulled the award, the U.S. court deemed it appropriate to defer to that decision.
In order to determine if Laos was entitled to relief, the Second Circuit referred to the grounds for refusal of recognition of an award under the New York Convention, enacted as Chapter 2 of the Federal Arbitration Act, 9 U.S.C. §201, et seq. The New York Convention, Article V provides the enumerated grounds for refusing to recognize and enforce an award. Article V(1)(e), relevant here, states,
Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: . . . (e) [t]he award . . . has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
The Second Circuit noted it was not required to suspend or refuse enforcement to an annulled award, but held “that the scope of that discretion is ‘constrained by the prudential concern of international comity.'” It then compared the recognition of an annulled award in Pemex. In Pemex, the Second Circuit held that it was appropriate to refuse to recognize a foreign judgment annulling an award in order to “vindicate fundamental notions of what is decent and just in the U.S.” But the circumstances of that case were rare, and included retroactive legislation which effectively deprived the claimant of any recourse under its contract. The Second Circuit compared the extension of time to challenge the award that was granted to Laos by the Malaysian courts, with the Mexican court’s retroactive application of new legislation in order to vacate an award. It found that the situation in this case did not rise to the level of that in Pemex that would justify enforcing an annulled award, noting that “although we might not necessarily agree with the merits of the Malaysian courts’ judgments, we see no grounds” similar to those in Pemex. The Second Circuit thus affirmed the District Court’s decision to vacate its August 2011 judgment, putting an end to TLL’s almost eight-year long attempt to enforce the award against Laos. Interestingly, the parties were ordered to recommence arbitration proceedings, so stay tuned to this space for updates as this saga continues.