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October 07, 2016 Practice Points

Arbitration Award Overturned in Mexico, Confirmed in New York

By Mark Kantor

On August 2, 2016, the Court of Appeals for the Second Circuit affirmed the decision of the District Court for the Southern District of New York to confirm an arbitration award in favor of COMISSA and against PEMEX (PEP) that had been vacated by the supervisory court in Mexico. Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploración Y Producción, 2016 WL 4087215, Docket No. 13-4022 (2nd Cir. August 2, 2016).

The appellate panel ruled that:

(1) There is personal jurisdiction over PEP, and venue lies in the Southern District of New York;
(2) The district court did not abuse its discretion in confirming the award; and;
(3) The district court, which included in its judgment $106 million in performance bonds that PEP collected, did not thus exceed its authority.

Accordingly, it affirmed the district court judgment in all respects.

Procedural History   
“When the parties’ relationship disintegrated, each side accused the other of breach. COMMISA initiated arbitration proceedings, prevailed, and in 2009 obtained an award of approximately $300 million. COMMISA then petitioned the United States District Court for the Southern District of New York . . . (“Southern District”) for confirmation of the award, which was done. PEP appealed the district court’s judgment to this Court (“First Appeal”) and simultaneously attacked the arbitral award in the Mexican courts. The Eleventh Collegiate Court in Mexico 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. Armed with that decision, PEP moved in this Court to vacate the Southern District’s judgment and remand the First Appeal in light of the Eleventh Collegiate Court’s decision. [The Second Circuit] granted that motion. On remand, the Southern District conducted an evidentiary hearing, adhered to its previous ruling, issued a new judgment confirming the arbitral award, and thus set the stage for the present appeal.”

Second Circuit Decision
Before reaching the merits of the dispute, the Second Circuit upheld its jurisdiction and, based on principles of waiver or forfeiture, rejected an argument of improper venue. Although the panel was not unanimous in how it approached these issues, it reached the same results. The panel was unanimous in its opinion on the substantive issue of confirmation.

In addressing whether the arbitration award should be confirmed despite the Mexican Court ruling, the Second Circuit treated the analysis as the same under the Inter-American Convention on International Commercial Arbitration (the Panama Convention) and the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). It held that there was “no substantive difference between the two; both evince a ‘pro-enforcement bias.’”

The court then proceeded under the Panama Convention and the Federal Arbitration Act (FAA). In doing so, the court recognized that, even though the Panama Convention sets out only seven enumerated bases for declining confirmation, principles of comity also must be considered:

[A] district court must enforce an arbitral award rendered abroad unless a litigant satisfies one of the seven enumerated defenses; if one of the defenses is established, the district court may choose to refuse recognition of the award.

At first look, the plain text of the Panama Convention seems to contemplate the unfettered discretion of a district court to enforce an arbitral award annulled in the awarding jurisdiction. However, discretion is constrained by the prudential concern of international comity, which remains vital notwithstanding that it is not expressly codified in the Panama Convention.

The court distilled these principles by stating that, although the Panama Convention provided discretion in enforcing a foreign award that has been annulled in the awarding jurisdiction, “the exercise of that discretion . . . is appropriate here only to vindicate [public policy, that is]‘fundamental notions of what is decent and just’ in the United States.” Id. at *8–9. Applying these considerations, the Second Circuit concluded that the district court:

did not abuse its discretion in confirming the arbitral award notwithstanding invalidation of the award in the Mexican courts. The high hurdle of the public policy exception is surmounted here by four powerful considerations: (1) the vindication of contractual undertakings and [PEP’s] 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.

Notably, the Second Circuit stated that it was not disagreeing with the analysis of the Mexican Court. Rather, the decision of the district court, as affirmed by the Second Circuit, was an exercise of discretion “to assess whether the nullification of the award offends basic standards of justice in the United States.” The Second Circuit commented that:

Any court should act with trepidation and reluctance in enforcing an arbitral award that has been declared a nullity by the courts having jurisdiction over the forum in which the award was rendered. However, we do not think that the Southern District second‐guessed the Eleventh Collegiate Court, which appears only to have been implementing the law of Mexico. Rather, the Southern District exercised discretion, as allowed by treaty, to assess whether the nullification of the award offends basic standards of justice in the United States. We hold that in the rare circumstances of this case, the Southern District did not abuse its discretion by confirming the arbitral award at issue because to do otherwise would undermine public confidence in laws and diminish rights of personal liberty and property. … Taken together, these circumstances validate the exercise of discretion and justify affirmance.

Keywords: New York Convention, Panama Convention, comity, nullification, decent and just, foreign award, sovereign immunity

Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.

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