Important Second Circuit Decision on Enforcement of International Arbitration Awards

In a significant recent judgment, CBF Industria De Gusa S/A v. AMCI Holdings, Inc. (2d Cir. 2017), the influential U.S. Court of Appeals for the Second Circuit (the Second Circuit) considered an arbitral award's preclusive effects and its ability to bind third parties.  In the same decision, the Second Circuit also issued valuable guidance to the lower courts on the correct procedure and terminology for the enforcement of New York Convention awards issued abroad. 

The Second Circuit handed down its initial opinion in January.  However, in a rare move, the Court released a revised opinion earlier this month to "correct" its conclusion on a point of law in the first opinion.  This post, unlike much of the online commentary of AMCI Holdings, refers exclusively to the Second Circuit's later opinion.

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Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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Upcoming webinar: Instability in Iraq and the implications for international energy contracts

Tuesday 21 October 2014, London, Dubai, Tokyo

9.30 – 10.30am BST
12.30 – 1.30pm GST
5.30 – 6.30pm JST

As the turmoil in Iraq shows no sign of abating, our panel of expert speakers draw from their own experience in advising clients in the oil and gas sector to consider the implications of this instability on international energy contracts, including:

  • Hydrocarbon legislation in Iraq, including the positions of the Government of the Kurdistan Region of Iraq (KRG) and the Federal Government of Iraq (FGI) in relation to power to legislate and contract for petroleum operations;
  • The legal proceedings launched by the FGI against the KRG and third party purchasers of oil exported by the KRG;
  • The implications of the ICC arbitration initiated by the FGI against Turkey under an Inter-Government Agreement;
  • The impact on international energy contracts of a potential declaration of independence by the Kurdistan Region of Iraq; and
  • The implications of export of oil from Iraq by IS (formerly ISIS).

Speakers:

If you would like to register for this event please contact Prudence Heidemans.

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French Supreme Court refuses to set aside ICC award in favour of the Congo

In GroupAntoine Tabet c/ la République du Congo, Cass. Civ. 1re, n° 11-16444 of 25 June 2014, the French Supreme Court (Cour de cassation) considered an application to have an award set aside on the grounds that the President of the tribunal had failed to disclose a relationship that was capable of raising doubts as to his independence.

The French Supreme Court upheld the award rendered at the International Court of Arbitration of the International Chamber of Commerce (ICC) in favour of the Republic of the Congo. The court refused to set aside the award, finding that there was no conflict of interest giving rise to a risk that the President of the tribunal might not have been independent and impartial. The court rejected the argument that the assessment of the arbitrator’s independence and impartiality should have involved an investigation into the substantive reasons behind the conclusion of certain contracts.

The judgment provides a welcome reminder of the limits to the court’s supervisory function, offering a clear indication that the role of the courts does not extend to independent investigation of the facts at issue. The decision also contributes to the ongoing development of French law in respect of arbitrators’ obligations of disclosure.

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New ruling of the French Cour de cassation in the Tecnimont judicial saga on challenge of an arbitrator

In Avax v Tecnimont (Civ. 1ère, 25 June 2014, pourvoi n° 11-26.529) the French Supreme Court reviewed the Paris Court of Appeal’s decision regarding the effect of the time limits in institutional rules on the judge reviewing the award. 

On 25 June 2014, the French Supreme Court (the Cour de cassation) held that a party that had failed to exercise its right to challenge an arbitrator within the time limit specified by the applicable arbitration rules is deemed to have waived its right to have the award set aside on that ground. In other words, the French Supreme Court held that the arbitration rules that have been chosen by the parties to govern the arbitration have a legal effect on the judge reviewing the award and cannot be disregarded once the arbitral award has been rendered. The decision reversed a controversial decision rendered by the Reims Court of Appeal in 2011.

This is the latest decision in the now long-running judicial saga of the 2007 ICC award in Avax v Tecnimont. The Paris Court of Appeal initially annulled the award in 2009, on the ground that the chairman of the tribunal had failed to disclose his law firm’s representation of companies affiliated to one of the parties during the arbitration proceedings. That decision was then reversed on a procedural ground by the French Supreme Court in November 2010. The case was then referred to the Reims Court of Appeal, which set aside the award again, this time for a failure to disclose conflicts of interests and to take into account the impact of the ICC rules on challenging arbitrators.

In the latest decision, the French Supreme Court ruled on the same case for the second time, but on a different legal issue, reversing the Reims Court of Appeal decision only on the question of the legal authority of the ICC Rules. It did not rule on the second question addressed to it, which concerned the scope of the arbitrator’s duty of disclosure. The French Supreme Court has sent the case back to the Paris Court of Appeal, which will issue another decision on the case (although it will be dealt with by a different chamber of the Paris Court of Appeal).

The decision is a reminder to parties to consider promptly their rights under any agreed institutional arbitration rules and, more importantly, to heed the time limits imposed by those rules.

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Cukurova v Sonera: Privy Council dismisses backdoor attempt to challenge tribunal’s findings at the enforcement stage

In the case of Cukurova Holdings AS v Sonera Holding BV [2014] UKPC 15, the Privy Council considered an appeal from the Court of Appeal of the BVI. The appellant (Cukurova) argued that permission to enforce an ICC arbitration award as a judgment should be set aside on the following grounds: (i) the tribunal lacked jurisdiction to grant the relief awarded to the claimant (Sonera); (ii) Cukurova was unable to present its case; and (iii) enforcement of the award would be contrary to public policy of the BVI.

In a pro-enforcement decision, the Privy Council dismissed Cukurova’s appeal on all three grounds and restated that the role of an enforcing court is not to evaluate whether or not, based on the reasons given, the arbitral tribunal got it right.

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The English Commercial Court considers whether a party’s failure to pay its share of the advance on costs is a repudiatory breach of the arbitration agreement

In BDMS Limited v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm), the English Commercial Court considered whether the Respondent’s failure to pay its share of the advance on costs in an ICC arbitration amounted to a repudiatory breach of the arbitration agreement entitling the Claimant to pursue its claim in court. In the particular circumstances, the judge considered that whilst a failure to pay constituted a breach of the arbitration agreement, such a breach was not repudiatory. Accordingly, the court granted a mandatory stay of the court proceedings.

This case provides useful clarification as to the repercussions of a party’s failure to pay an advance of costs and the avenues available to Claimants in such circumstances.

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Pakistan Supreme Court declares a contract – and the arbitration clause within that contract – void on public policy grounds

In a decision earlier this year the Pakistan Supreme Court declared that a joint venture agreement between a local development authority and BHP for the exploration of minerals was void on a number of public policy grounds. A subsequent novation of the agreement was also found to be void. Of particular interest to readers of this blog is that this decision included a finding that the arbitration clause in the agreement was also void, notwithstanding previous overtures from the Pakistani courts that it recognises the separability of an arbitration agreement.

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