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Enforcing Arbitral Awards that Have Been Set Aside in the Seat Where the Award Was Made – Different Approaches Towards the Same Thorny Issue

The issue of whether an arbitral award that has been annulled or set aside in the seat of the arbitration can nonetheless still be enforced in another jurisdiction is one that continues to generate diverging viewpoints. Below we discuss two different approaches recently given to similar legal questions involving this issue by the national courts of the United States of America and Brazil and show why, in the view of the authors, it is important for courts to retain the discretion afforded to them by various international treaties to proceed with the recognition and enforcement of arbitral awards that have been set aside in the seat where they were made, or under whose law they were made.

Both the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 ("New York Convention") and the Inter-American Convention on International Commercial Arbitration of 1975 ("Panama Convention") contemplate that a court may refuse to recognize and enforce an award that is set aside in the country, or under the law of which, the award was made. As a result, courts faced with applications to recognize awards that have been set aside have two choices: enforce the award subject to whatever restrictions their domestic law imposes or decline to recognize an award either on domestic or international law grounds.

In the past year, two high-profile cases decided by appellate courts in the United States and Brazil involving awards against major oil companies have thrown the differing approaches to recognition of set aside awards back into the limelight.

The first case to come down was EDF International S/A v. Endesa LatinoAmérica S/A and YPF S/A (S.T.J., SEC No. 5.782/AR, Relator: Jorge Mussi, 02.12.2015), which presented an issue of first impression for the Brazilian Superior Tribunal of Justice ("STJ"). In that case, the STJ was confronted with a petition by EDF International S/A ("EDF") to recognize a foreign arbitral award against YPF S/A and Endesa LatinoAmérica S/A that had been set aside in Argentina, which had been the seat of the arbitration.

The underlying arbitration arose out of a dispute involving a stock purchase agreement entered into between EDF, Endesa Internacional S.A. (which became Endesa LatinoAmérica S/A), and Astra Compañía Argentina de Petróleo S/A (which later merged with respondent YPF) on March 30, 2001. Significantly, the agreement granted EDF the right to request that the share price be reviewed if Argentina terminated the parity exchange rate between the U.S. dollar and the Argentinian peso. After Argentina's economic problems in late 2001 prompted it to terminate the parity exchange rate, EDF commenced an arbitration before the International Court of Arbitration of the International Chamber of Commerce ("ICC") to request the readjustment of the share price. In turn, Endesa and YPF filed counterclaims against EDF in the ICC proceedings. The arbitral tribunal granted EDF's claims and the Respondents'´ counterclaims. After the respective awards were set off against each other, however, there was an outstanding credit in favor of EDF in the approximate amount of $129,691,725, plus interest.

Both parties nonetheless commenced annulment proceedings before the Commercial Court of Appeals in Buenos Aires against different aspects of the award. Those proceedings were initiated even though the arbitration agreement between EDF and Endesa/YPF provided that the arbitral award was "not subject to appeal." After reviewing the parties' submissions, the Court of Appeals sitting in Buenos Aires, Argentina set aside the award in toto in December of 2009 concluding that the arbitral tribunal's award suffered from certain procedural, jurisdictional and legal defects.

Notwithstanding the Buenos Aires Court of Appeals' decision to set aside the entirety of the award, EDF applied for recognition of its award in Brazil before the STJ. Having obtained the complete set aside of the award in Argentina, Endesa and YPF responded to EDF's recognition application by arguing that the award could not be recognized in Brazil because it had been set aside at the seat of the arbitration.

In evaluating the petition before it, the STJ began by emphasizing the need to analyze the various international agreements/treaties that Brazil had signed on the subject of enforcing foreign arbitral awards. The STJ then went on to quote the texts of Articles V(1)(e) of the New York and Panama Conventions, the text of Article 38(6) of Brazil's Arbitration Law (Law no. 9.307/1996), which provides that the recognition of an award can [but not must] be denied where an award is annulled in the country where it was issued, and the STJ's internal rules governing the recognition of foreign awards. Adopting a very restrictive interpretation of those provisions, the STJ found that it was precluded from enforcing an award that has been set aside in the jurisdiction where it was rendered. To further justify its ruling, the STJ relied on the International Council for Commercial Arbitration's Guide to the Interpretation of the New York Convention, various Brazilian legal scholars and Article 20 (e) of the Las Leñas Protocol, which grants extraterritorial effects to an arbitral award with res judicata effect in the arbitration seat.

The STJ's reasoning was that recognition proceedings in Brazil have as their main purpose to allow a foreign award with res judicata effect to take legal effect in Brazil but that an award that has been set aside in the jurisdiction where it was rendered no longer has legal effect in the seat and thus there is no legal effect to be given to that award in Brazil. One of the most interesting (and perhaps controversial) aspects of this Brazilian decision is that the STJ seemed to be concluding that it was required to deny recognition and enforcement given that the Argentine court had set aside the award even though Article 38(6) of Brazil's Arbitration Law and the other texts cited, including the New York and Panama Conventions, provide the Brazilian courts with discretion to deny recognition and enforcement, but do not mandate this result.

In August 2016, offering a different interpretation of the New York and Panama Conventions and on the notion of comity that may be extended to decisions of foreign courts, the U.S. Court of Appeals for the Second Circuit ("Second Circuit") in Corporación Mexicana de Mantenimiento Integral v. Pemex-Exploración Y Producción, No. 13-4022 (2d Cir. Aug. 2, 2016) affirmed the decision of the United States District Court for the Southern District of New York (SDNY) to recognize and allow enforcement of a foreign arbitration award in favor of Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. ("COMMISA") that had been set aside in Mexico, which was the seat of the arbitration.

The arbitration that gave rise to the award in favor of COMMISA stemmed from a 1997 agreement between that company and PEMEX–Exploración y Producción ("PEP"), a subsidiary of Mexican state-owned oil company, PEMEX, to build two offshore platforms. The parties' agreement provided that any dispute between them was to be settled through international arbitration conducted in Mexico City in accordance with the Conciliation and Arbitration Regulations of the ICC and included a clause allowing PEP to administratively rescind the contract if COMMISA failed to comply with certain obligations under the contract. As the platforms were nearing completion, PEP notified COMMISA that it intended to administratively rescind the parties' contract.

On December 1, 2004, COMMISA initiated an ICC arbitration against PEP. While the arbitration between COMMISA and PEP was pending, the Mexican Congress amended the Law of Public Works and Related Services, effective May 28, 2009, to require that "[t]he administrative rescission, early termination of the contracts and such cases as the Regulation of this Law may determine may not be subject to arbitration proceedings." Notwithstanding the amendment, the ICC tribunal issued an award in favor of COMMISA on December 2009, holding PEP liable for the administrative rescission of the contract..

On January 2010, COMMISA filed a petition to confirm the ICC award in its favor before the SDNY, which confirmed the award. PEP promptly appealed to the Second Circuit. While that appeal was pending, a Mexican appellate court annulled the award on public policy grounds. Denying that it was retroactively applying the revised Law of Public Works and Related Services, the Mexican appellate court claimed that it set aside the award on public policy grounds and that it only was relying on the statutory revisions to "strengthen" its public policy conclusion. After the award in favor of COMMISA was annulled in Mexico, PEP secured a remand from the Second Circuit to the SDNY so that the SDNY could evaluate the impact of the award's annulment in Mexico.

On remand, the SDNY found that it had discretion under Article V(1)(e) of the Panama Convention to enforce the COMMISA award even though it had been set aside in Mexico and opted again to enforce it, declining to defer to the decision of the Mexican appellate court that set aside the award. The SDNY reasoned that the Mexican appeals court had not cited any statute, case law, or any other source of authority that put COMMISA on notice that it had to pursue its claims in court, rather than in arbitration.

Thereupon, PEP appealed yet again to the Second Circuit which held that the use of "may" in the Panama Convention provides a district court with discretion to recognize an award that has been set aside at it seat subject to the "prudential concern of international comity, which remains vital notwithstanding that it is not expressly codified in the Panama Convention." After determining that the district court could disregard the effect of the COMMISA award's annulment in Mexico, the Second Circuit then held that "it is incontestable that the capacity of PEP to arbitrate was established in prior law; that it was withdrawn with respect to certain disputes that had already arisen; and that it was withdrawn in a way that frustrated contractual expectation, undid an arbitral award, and precluded redress by COMMISA in any forum."

The sharp contrast between the more expansive–and in the authors' view correct–reading of the Panama and New York Conventions by the U.S. courts and the narrower reading given to these international treaties by the Brazilian STJ underscores that national courts will continue to split on the enforcement of awards that have been set aside in the jurisdictions where they were made, or under whose law they were made. This may well be explained by the different views that varying judicial systems have on the issue of international comity and the discretion that they have to enforce, or not, awards that have been set aside by the national courts in the jurisdictions where they were made, or under whose law they were made. While these variances in treatment of foreign court's decisions are understandable, facts like the ones at issue in the COMMISA v. PEP case demonstrate why it is important that national courts retain the discretion to choose to enforce arbitral awards that have been set aside by the national courts where the award was made, or under whose law they were made.