Judge Upholds $400M Award in Oil Dispute

(CN) - Mexico's state-owned oil company owes an American-owned company and subsidiary of KBR $400 million for breach of contract, a federal judge ruled.

In 1997, and again in 2003, Pemex-Exploracion y Produccion, a subsidiary of state-owned Petroleos Mexicanos, hired Corporacion Mexicana de Mantenimiento Integral (COMMISA), a Mexican subsidiary of 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But in 2004, both parties accused the other of breaching the contract, and Pemex rescinded the contracts.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 had a Mexican appellate court nullify 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 was the Mexican district court for administrative matters.

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 2nd 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 on Tuesday.

"Applying a law that came into effect well after the parties entered into their contract was troubling," the 32-page opinion states. "But this unfairness was exacerbated by the fact that the Eleventh Collegiate Court's decision left COMMISA without a remedy to litigate the merits of the dispute that the arbitrators had resolved in COMMISA's favor."

"In declining to defer to the Eleventh Collegiate Court, I am neither deciding, nor reviewing, Mexican law," Hellerstein added. "I base my decision not on the substantive merit of a particular Mexican law, but on its application to events that occurred before the law's adoption. At the time COMMISA brought its claims against PEP [Pemex], there was no statute, case law, or any other source of authority that put COMMISA on notice that it had to pursue its claims in court, instead of in arbitration. COMMISA reasonably believed that it was entitled to arbitrate the case, and the Eleventh Collegiate Court's decision disputed this reasonable expectation by applying a law and policy that was not in existence at the time of the parties' contract, thereby denying COMMISA an opportunity to obtain a hearing on the merits of its claims. The decision therefore violated basic notions of justice, and I hold that the award in favor of COMMISA should be confirmed."

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