2nd Cir. Upholds $400M Award Against Pemex

(CN) — Mexico's state-owned oil company owes an American-owned company and subsidiary of KBR $400 million for breach of contract, the Second Circuit ruled Tuesday, overriding a Mexican court's contrary ruling.

In 1997, and again in 2003, Pemex-Exploracion y Produccion, a subsidiary of state-owned Petroleos Mexicanos, hired Corporacion Mexicana de Mantenimiento Integral , or COMMISA, a Mexican subsidiary of American engineering company KBR, to build offshore natural gas platforms in the southern Gulf of Mexico.

But in 2004, both parties accused the other of breaching the contract, and Pemex rescinded the contracts.

Mexican courts upheld Pemex's action, but COMMISA then sought and won civil damages for breach of contract before an arbitration panel.

The panel awarded COMMISA $289 million, plus $7.5 million in attorneys' fees and expenses.

In 2010, U.S. District Judge Alvin Hellerstein in New York let COMMISA confirm the award, which was then worth nearly $400 million.

Pemex secured the judgment, but a year later a Mexican appeals court nullified the award. In a 486-page decision, the court found that it was unacceptable to allow arbitrators to resolve a matter of public policy, and the proper venue for administrative matters was the Mexican district court.

The decision relied heavily on a law implemented in 2009, years after the parties began litigation, which provides that administrative rescission shall not be subject to arbitration. The court claimed it was not applying the law retroactively, but as a guiding principle.

COMMISA could no longer bring an administrative complaint, however, because the statute of limitations had expired.

The Manhattan-based Second Circuit meanwhile vacated the enforcement judgment and remanded the case to Hellerstein, who held three days of hearings this year to figure out his next move.

Hellerstein again confirmed the award for COMMISA in 2013.

This time, the Second Circuit affirmed the decision Tuesday, despite the Mexican court's contrary ruling.

"Although the Panama Convention affords discretion in enforcing a foreign arbitral award that has been annulled in the awarding jurisdiction, and thereby advances the Convention's pro-enforcement aim, the exercise of that discretion here is appropriate only to vindicate 'fundamental notions of what is decent and just' in the United States," Judge Dennis Jacobs said, writing for the three-judge panel.

The North American Free Trade Agreement, or NAFTA, aims to ensure that parties who accept binding arbitration provisions will be given equal treatment before an impartial tribunal.

"Giving effect to PEP's 12th-hour invocation of sovereign immunity shatters COMMISA's investment-backed expectation in contracting, thereby impairing one of the core aims of contract law," the panel said.

Jacobs described COMMISA's situation as "government expropriation without compensation" that would be undoubtedly unconstitutional in the U.S.

"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," Jacobs said. "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."

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