US confirms PEMEX Arbitration Award despite Annulment

In a decision reminiscent of Chromalloy, a US Court earlier this week confirmed an award in favour of Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V., a subsidiary of Delaware registered and Houston based construction and military contractor KBR, Inc., against PEMEX-Exploración y Producción, a subsidiary of Mexican state-owned Petróleos Mexicanos (‘PEMEX’).

The case concerned the scope and application of the US Court’s discretion whether or not to confirm a foreign arbitration award that had been annulled by a competent authority at the seat of arbitration.  The question fell to be determined pursuant to Article 5 of the Inter-American Convention on International Commercial Arbitration (the ‘Panama Convention’), but the principles at stake are the same as for the substantially identical provision in Article V(1)(e) of the New York Convention.

Judge Alvin K. Hellerstein of the U.S. District Court of the Southern District of New York gave judgment on 27 August 2013.  He followed established case law that normally required deference to the annulment decision of the competent court at the seat of arbitration save in exceptional circumstances where that decision violated “basic notions of justice”.

The competent Mexican Court had annulled the award by applying a law that had been passed after the underlying contract had been made to the effect that arbitrators are not competent to hear and decide cases brought against the sovereign or one of its instrumentalities.  Judge Hellerstein found this annulment decision to be a basic violation of justice since it offended elementary considerations of fairness: it was applied retroactively to an arbitration agreement that had been entered into under specific statutory authorization; it “was undertaken to favor a state enterprise over a private party”, and its unfairness was exacerbated by the fact that it left the Claimant without any remedy to litigate the merits of the dispute that the arbitrators had resolved in its favour.

A copy of the judgment is available at http://www.nysd.uscourts.gov/cases/show.php?db=special&id=323

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