November 07, 2016 Practice Points

Public Policy Challenge Rejected and International Award Confirmed

By Michael S. Oberman

On November 7, 2016, by summary order, the Second Circuit affirmed the confirmation of an international award, finding that the award did not violate public policy. PDV Sweeny, Inc. PDV Texas, Inc v. Conocophillips Company. The award was reviewed under the Inter-American Convention on International Arbitration as well as the New York Convention. The Inter-American Convention provides that a court may refuse to recognize an award if the court finds that “recognition or execution of the decision would be contrary to public policy.”

The court first stated the applicable standard:

[A] court’s task in reviewing an arbitral award for possible violations of public policy is limited to determining whether the award itself, as contrasted with the reasoning that underlies the award, ‘creates an explicit conflict with other laws and legal precedents’ and thus clearly violates an identifiable public policy.” International Bhd. Of Elec. Workers, Local 97 v. Niagara Mohawk Power Corp., 143 F.3d 704, 716 (2d Cir.1998) (alterations omitted) (quoting United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 43 (1987)). The public policy exception to enforcement of arbitral awards is “construed very narrowly,” requiring a showing that “enforcement [of the challenged award] would violate our most basic notions of morality and justice.” Telenor Mobile Commc’ns AS v. Storm LLC, 584 F.3d 396, 411 (2d Cir. 2009) (internal quotation marks omitted)….

The court then addressed the challenge, which contended that the award ran afoul of the public policy against penalty provisions in contracts. The court noted that, although New York had such a policy, it was not clear that the policy was one embodied in “our most basic notions of morality and justice.” The court found that it need not decide if this policy was applicable, because a court’s role is only to “consider whether the award itself violates public policy.” Here, the arbitrators considered and addressed the issue of public policy against contract penalties, but found the policy issue inapplicable because they concluded that the amount to be paid fell under a termination provision and not a liquidated damages provision. The Second Circuit made clear that “we cannot revisit or question the fact-finding or legal reasoning that produced a challenged arbitration award.” The court concluded:

Here, petitioners point to no ‘laws [or] legal precedents’ indicating that termination provisions setting the terms for ending a joint venture are contrary to ‘well defined and dominant’ public policy, W.R. Grace & Co. v. Local Union, 759, 461 U.S. 757, 766 (1983) (internal quotation marks omitted), much less are violative of our most basic notions of morality and justice.

Thus, like the district court, we conclude that petitioners failed to show that public policy precluded confirmation of the arbitration award.

This decision reiterates the heavy burden that faces those challenging international awards on public policy grounds. Such challengers must be able to identify a well-defined and strong public policy that the award violates.

Key words: alternative dispute resolution, adr, litigation, international award, Inter-American Convention on International Awards, New York Convention, public policy

Michael S. Oberman is counsel with Kramer Levin Naftalis & Frankel LLP in New York, New York.

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