August 2016 – Last week the U.S. Court of Appeals for the Second Circuit issued a long-awaited ruling in which it: (i) enforced an arbitral award even though it had been set aside by the courts of the seat of the arbitration; and (ii) re-affirmed the principle that state-owned corporations are entitled to invoke the due process protections of the U.S. Constitution so long as they are not the “alter ego” of the state itself.
The deference issue. U.S. courts have traditionally deferred to decisions by the courts of the “seat” – that is, where the arbitration took place – to set aside or vacate an arbitration award. Nonetheless, some U.S. courts previously recognized a potential limited exception for “extraordinary circumstances” where such deference would be “repugnant to fundamental notions of what is decent and just.” See, e.g., TermoRio v. Electranta, 487 F. 3d 928, 938 (D.C. Cir. 2007). Until now, however, no court had found that a case met the burden to invoke that exception.
The Second Circuit held that such “extraordinary circumstances” did exist in Corporación Mexicana de Mantenimiento Integral v. Pemex-Exploración Y Producción, No. 13-4022 (2d Cir. Aug. 2, 2016) (“Pemex“). The case followed a long fight between Commisa, a Mexican subsidiary of U.S. corporation KBR, and Pemex, a subsidiary of the Mexican state-owned oil corporation. Just before the arbitral tribunal issued a $300 million award in favor of Commisa, Mexico passed two laws that directly affected the dispute. Those laws: (i) gave exclusive jurisdiction to Mexico’s tax court over claims relating to public contracts; and (ii) provided that a state-owned entity’s decision to exercise rights of “administrative rescission,” the very claim at issue in the arbitration, was not subject to arbitration.
Pemex sought vacatur of the arbitration award in Mexico and obtained a ruling that Commisa’s claims were not arbitrable under the newly enacted laws. Commisa petitioned for and obtained confirmation of the same award in the Southern District of New York. The district court held that the retroactive application of newly enacted laws by the Mexican courts effectively deprived Commisa of any forum for its claims. Hence, the Mexican court’s decision was “repugnant” to U.S. public policy principles and was not entitled to deference. The Second Circuit affirmed, agreeing that the unique facts in Pemex made this an “extraordinary” case in which the award should be enforced despite the Mexican set-aside decision.
Ultimately, the Pemex decision does not signal a change in the way U.S. courts will view decisions to vacate arbitral awards at the seat. Instead, it illustrates the extraordinary circumstances that will be required for a U.S. court to consider a decision “repugnant” to U.S. public policy principles. Future courts are unlikely to follow the result in Pemex absent similarly extreme facts.
The due process issue. While the ruling on confirmation has received the most press, the Second Circuit also weighed in on a second important issue: whether state-owned entities are entitled to invoke the due process protections of the U.S. Constitution in contesting personal jurisdiction of U.S. courts. In the traditional analysis, a foreign state-owned corporation enjoys due process protections, while a foreign state does not. Here, the Second Circuit found that Pemex should be treated as the Mexican state, because Pemex itself had argued that it was “functionally the Mexican government” in challenging enforcement of the award. Therefore, it concluded that Pemex was not entitled to due process protections.
Importantly, however, the Second Circuit specifically recognized that state-owned entities are presumed to be separate from the state, and therefore may assert due process challenges to personal jurisdiction. Their success in asserting those protections will depend on whether they are found to be the alter ego of the state.
We would be pleased to provide you with additional information or answer any questions you may have about how this decision could affect you going forward. Please feel free to email or call your partner contact at Chaffetz Lindsey for more details.
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