By Carlos
Ramos-Mrosovsky
2014 was an active year for international
arbitration generally and for international investment treaty arbitration in
particular. In this post, Carlos
Ramos-Mrosovsky, a senior associate with Freshfields’ International Arbitration
Group in New York,[1]
considers three cases that were particularly notable over the past year.
BG
Group, PLC v. Republic of Argentina
In BG v.
Argentina, the United States Supreme Court issued its first-ever decision
in connection with investment treaty arbitration, reversing a D.C. Circuit
decision to vacate an US$185 million UNCITRAL award in favor of a British
investor in the Argentine gas sector.[2]
The D.C. Circuit had vacated the arbitral award
on the theory that the tribunal had exceeded its powers by hearing the dispute
despite the claimant’s non-compliance with a provision of the governing
UK-Argentina Bilateral Investment Treaty (BIT) facially requiring them to
pursue their claims before the Argentine courts for 18 months before commencing
arbitration.[3]
For its part, the arbitral tribunal had found this treaty requirement to be
excused because Argentine domestic legislation would have made efforts to
pursue BG’s claim in local courts “absurd and unreasonable.”
Granting certiorari
despite the opposition of the U.S. Solicitor General, the Supreme Court
reversed the D.C. Circuit by a vote of 7–2, and reinstated the arbitral
tribunal’s award. As Justice Breyer’s majority opinion explained, compliance
with the treaty’s local litigation requirement was a procedural issue, as to
which an arbitral tribunal’s opinion was as entitled to deference from a
reviewing court in a treaty-based arbitration, as in a contractual one.[4] The majority rejected the
Circuit’s view that the local litigation requirement was a threshold issue of
“arbitrability” presumptively subject to de
novo review by the court.
Crucially, the Supreme Court’s decision in BG turned not on the Court’s view of the
arbitral tribunal’s specific interpretation of the treaty requirement, but on
its view of the proper relationship between courts and arbitral tribunals.[5] By declining to subject arbitral
tribunals to additional second-guessing where a treaty is involved, the
decision in BG not only reaffirms the
status of the United States as a jurisdiction friendly to international
arbitration, but, importantly, also reinforces the legitimacy of investor-state
arbitration by sending an important message that the U.S. judiciary respects
the international investment treaty arbitration regime.
Corporación Mexicana de Mantenimiento Integra, S. de
R.L. de C.V. (COMMISA) v. PEMEX-Exploración y Producción
Another important arbitration-related case that
attracted immense attention over the past year is COMMISA v. PEMEX, decided by a U.S. district court in late 2013,
and currently pending on appeal before the Second Circuit. In Pemex,
for the first time in nearly two decades, a U.S. district court agreed to
enforce a foreign arbitral award that had been annulled at the seat of
arbitration.[6] The district court’s decision was appealed to
the 2d Circuit, which heard oral arguments in November of 2014. A decision is anticipated in early 2015.
In Pemex,
the district court read the word “may” in Article V(1)(e) of the Panama
Convention, which provides that recognition and enforcement of an award “may be
refused” where an award “has been annulled or suspended by a competent
authority of the State in which, or according to the law of which, the decision
has been made,” to allow it to confirm an award that had been annulled by a
Mexican court. The district court in Pemex acknowledged prior cases finding
that U.S. courts “normally may not enforce an arbitration award that has been
lawfully set aside by a ‘competent authority’” at its seat.[7] But the Pemex
district court also referenced language in earlier court decisions that at
least theoretically preserved a court’s ability to enforce an award, despite
its annulment at the seat, in at least those extraordinary cases where
“fundamental notions of fairness” justified doing so.[8] The Pemex
district court concluded that this high standard had been met, because it found
that the Mexican courts had annulled the arbitral award on the basis of a
retroactive application of new law, contrary to the claimant’s reasonable
expectations, in favor of a state respondent, leaving the claimant with no
other available remedy. Though never stated
directly in the district court’s decision, it has been suggested that the
district court may have been influenced by the perception that the Mexican
courts’ setting-aside of the award had been results-oriented, and that the
claimant had received less than a fair shake from the Mexican judiciary.
Pemex’s result is not limited
to the Panama Convention, however, as the language of that treaty is
functionally equivalent to that of the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (1958), the primary treaty providing for
the international recognition and enforcement of arbitral awards.[9] If the district court’s
decision is affirmed by the Second Circuit, Pemex
would arguably signal an important evolution in the attitude of the U.S.
judiciary towards international arbitration awards, signaling willingness,
albeit in exceptional circumstances, to override an annulment decision from the
primary jurisdiction, i.e. the courts of the arbitral seat. At the same time, the Pemex decision serves as a useful reminder of the occasional power
of arguments about procedural fairness even in a context where judicial
intervention is normally tightly circumscribed.
Hulley
Enterprises Limited (Cyprus); Yukos Universal Limited (Isle of Man); and
Veteran Petroleum Limited (Cyprus) v. The Russian Federation[10]
The potential scale and significance of
international investment treaty arbitration awards were dramatically
demonstrated by the largest-ever international arbitration award, in a case underscoring
the high stakes and geopolitical dimension of international investment
arbitration. Three parallel claims brought by foreign shareholders of Yukos,
once Russia’s largest oil and gas company, under the Energy Charter Treaty,
were heard by a single panel convened under the auspices of the Permanent Court
of Arbitration in The Hague. The
claimant shareholders argued that Yukos’s break-up by the Russian government
between 2003 and 2006 had actually been the result of a complex scheme to
expropriate the company’s assets and place them under state control to punish
political opponents. Russia, on the
other hand, insisted that Yukos had been properly broken up in response to its
evasion of taxes and status as a “criminal enterprise” run by wealthy oligarchs.[11] The Tribunal found for the claimants and
ordered Russia to pay the Yukos shareholders US$50 billion in compensation, along
with a furtherUS$60 million in legal fees.[12] Although this is the largest international
arbitral award reported to date, the Yukos
claimants had actually demanded “no less than” US$114 billion.[13]
The Yukos
award is notable not only for its size, but also for the nature of its quantum
analysis. In particular, the Yukos
tribunal relied upon a “comparable companies” methodology to gauge Yukos’s
value in light of the market capitalization of similar companies. The tribunal
adjusted the value obtained to the date of award by indexing to certain oil and
gas stocks traded in Moscow. At the same time, the tribunal embraced the
concept of contributory fault, reducing the damages awarded by 25% to reflect
its conclusion that at least some of Yukos’s tax arrangements had in fact been
abusive and unlawful.[14] The Tribunal nevertheless
refused to treat Yukos’s “unclean hands” as a jurisdictional bar, rejecting the
argument that such a doctrine should be considered a general principle of
international law.[15]
There is no guarantee that so massive an award
will ultimately be paid. The Russian government has denounced the award—issued
at a time of heightened tension between Russia and NATO over Ukraine—as
politically motivated and has vowed to resist its enforcement in proceedings
that will doubtless prove protracted and complex.[16] Nevertheless, the Yukos award highlights the stakes involved in some investment
treaty cases and may make other arbitral tribunals’ more comfortable with awarding
larger amounts in compensation in appropriate cases.
These cases, important in themselves,
simultaneously illustrate broader debates within the international arbitration
community. In BG, the U.S. Supreme Court may be seen to have endorsed investor-state
arbitration, despite its many critics, as a dispute resolution regime entitled
to the same deference and support as ordinary international commercial
arbitration. Meanwhile in Pemex, U.S.
courts may be inching, albeit very cautiously, toward an understanding of arbitral
awards as part of an “international” legal order that is less deferential to
the courts of the seat of arbitration. Finally, Yukos serves as a reminder of how much may be at stake in
investor-state disputes, not simply financially, but also from a political
perspective, while the huge sums awarded cannot fail to attract the continued
interest of the world’s lawyers, investors, scholars – and perhaps litigation
funders – to the field.
The views
expressed above are the author’s alone and are not necessarily the views of
Freshfields Bruckhaus Deringer LLP, Freshfields Bruckhaus Deringer US LLP, or
of any of the firm’s clients.
[1]
The author can be contacted at Carlos.Ramos-Mrosovsky@freshfields.com.
[2]
BG Group,
PLC v. Republic of Argentina, 572
U.S. __ (2014), 134 S.Ct. 1198.
[3] 664
F.3d 1363 (2012).
[4] BG, 134
S.Ct. at 1208 (“As a general matter, a treaty is a contract, though between
nations. Its interpretation normally is, like a contract’s interpretation, a
matter of determining the parties’ intent. And where, as here, a federal court
is asked to interpret that intent pursuant to a motion to vacate or confirm an
award made in the United States under the Federal Arbitration Act, it should
normally apply the presumptions supplied by American law.”).
[5] BG, 134
S.Ct. at 1209 (“in
the absence of explicit language in a treaty demonstrating that the parties
intended a different delegation of authority,” the “ordinary interpretive
framework” governing arbitrations arising under a contractual arbitration
clause applies).
[6] Corporación
Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (COMMISA) v.
PEMEX-Exploración y Producción, 962 F.Supp.2d 642 (S.D.N.Y. 2013). See also Chromalloy Aeroservices v. Arab Republic of
Egypt, 939 F.Supp. 907 (D.D.C
1996).
[7] TermoRio S.A. E.S.P. v. Electranta S.P.,
487 F.3d 928, 935 (D.C. Cir. 2007).
[8] COMMISA,
962 F.Supp.2d at 656-657 (“a district court should hesitate to defer to a
judgment of nullification that
conflicts with fundamental notions of fairness”).
[9]
Inter-American Convention on International Commercial Arbitration, Jan. 30,
1975, 104 Stat. 448, 14 I.L.M. 336 (1975) (Panama Convention); New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June
10, 1958, 21 U.S.T. 2517; 7 I.L.M. 1046 (1958). See also 9 U.S.C. §§ 301-307 and Productos Mercantiles e Industriales, S.A., v. Faberge USA, Inc.,
23 F.3d 41, 45 (2d. Cir. 1994) (Panama and New York Conventions should yield
same results).
[10]
Hulley Enterprises Limited (Cyprus);
Yukos Universal Limited (Isle of Man); and Veteran Petroleum Limited (Cyprus) [Yukos] v. The Russian Federation, PCA Cases Nos. AA 226, 227, 228.
[11]
Yukos, at ¶ 73.
[12]
Yukos, at ¶ 1888.
[13]
Yukos, at ¶ 4.
[14]
Yukos, at ¶ 1637.
[15]
Yukos, at ¶ 1363.
[16] See, e.g., Stanley Reed, “$50 Billion Awarded in
Breakup of Yukos,” New York Times (July
28, 2014) (noting the Russian government’s characterization of the Yukos award as “politically biased”).
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