COMMISA V. PEMEX: SECOND CIRCUIT CONFIRMS COMMISA’S AWARD
Applying this standard, we conclude that the Southern District did not abuse its discretion in confirming the arbitral award notwithstanding invalidation of the award in the Mexican courts. The high hurdle of the public policy exception is surmounted here by four powerful considerations: (1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.
It is to stress out that the Circuit judges in no moment wanted nor to review the legal reasoning of the Mexican Courts, neither to put their decisions in doubt. The Court only focuses on the result of those decisions in the light of US – and international – Public Policy.
Concerning arbitrability, the Court considers that:
The “Pemex and Affiliates Organic Law” specifically authorized PEP to agree to execute arbitration agreements, as it did in both the 1997 and 2003 contracts; the arbitration clauses likewise constrained COMMISA to arbitrate as the sole recourse for challenging any breach. When arbitration proceedings were underway, PEP participated without contending that its act of administrative rescission was beyond the reach of arbitration; that argument was advanced only after PEP’s loss was presaged by issuance of the Preliminary Award.
In other words, Pemex only objected to arbitrability and the arbitral tribunal’s jurisdiction once it got the impression that the arbitration did take an unfavorable course. Following the estoppel principle, even if the Circuit does not mention it as such, well, you cannot just change your mind when things go south. And that’s exactly what Pemex did.
And in a very surprisingly way, the Court emphasizes that it views are not only the one of its own legal order, but that it is an international one:
These values are not local. The North American Free Trade Agreement (“NAFTA”), ratified by Mexico and the United States, treats arbitration as a “mechanism for the settlement of investment disputes that assures both equal treatment among investors of the Parties in accordance with the principle of international reciprocity and due process before an impartial tribunal. Giving effect to PEP’s twelfth‐hour invocation of sovereign immunity shatters COMMISA’s investment‐backed expectation in contracting, thereby impairing one of the core aims of contract law.”
The Circuit adopts a casi Nafta arbitration reasoning, based on the Fair & Equitable Standard: Yes, maybe the Mexican Court is right in saying that it does not apply a law retroactively, but is doesn’t matter: the result is that Commisa was “frustrated in its contractual expectation”. Period. Not only that; the Circuit adds – even if it didn’t have to -, that as a matter of fact, Commisa was expropriated. And once again, the judges note that such a view is also in accordance with NAFTA.
In conclusion, the ICC award that condemned Pemex must be upheld and enforced.
In our first post, we said that:
To sum up, a last minute inarbitrabilitiy (the Mexican Eleventh Collegiate Court’s decision) frustrating a valid and bona fide agreement violates without any doubt the international ordre public.
The Second Circuit underlines expresis verbis that it has not to pass upon the Mexican Court’s interpretation when it stated that it was not retroactively applying Section 98 of the administrative law, which foresees the exclusive jurisdiction of the Mexican federal courts to rule upon administrative rescission. What counts is the effect of Section 98 in these circumstances and upon these parties. And 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.
At the same time, the enforcement of such Mexican law amounted to a taking of private property without compensation for the benefit of the government. In the United States, this would be an unconstitutional taking.
This feature of United States law is not peculiar to this country. NAFTA provides that “[n]o party may . . . take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except . . . on payment of compensation in accordance with paragraphs 2 through 6.” .
In regard to the content of the ordre public, we already mentioned that there is no clear definition of it in Mexico. As well as the District Court as the Collegiate Court agreed on applying the public policy in its international dimension; but did disagree if an arbitration involving an administrative rescission does or not violate the fundamental basis of the Mexican State; which involves the predetermination if the said administrative rescission is or not an act of authority. In our opinion, there is no doubt that it is an act of authority and we do agree with Francisco Gonzalez de Cossio, expert witness for PEP, that the Mexican courts had long held that administrative rescissions were acts of authority, and that acts of authority cannot be arbitrated. As to the PEMEX organic law, which gives Pemex and its subsidiaries authority to engage in arbitrations, the law gives them the authority to engage in arbitrations in some circumstances, but it does not require them to arbitrate when such arbitration is contrary to public policy. There is no doubt that when signing the arbitration clause, COMMISA’s counsels were not aware of this privilege that Mexican instrumentalities have (as in other countries as well in France for instance.
Yes, Commisa’s counsels should have been more prudent when signing the agreement; yet, we approve the Second Circuit’s decision. There is no doubt that Pemex plaid “legal technicalities”, taking advantage of the very messy Mexican legal system. And there is no reason that the investor should be the victim: business is based on good faith and fairness.
On the reasoning, there is much to say about the Second Circuit’s ruling. First, the rationale is always twofold: in regard to its local law, and with reference to international regional standards, expressed in the NAFTA dispositions. Second, it is not so much about the law, than about the result, and this is a classic application of how the Public Policy exception works: it is not about the foreign court´s reasoning and/or the legality of its decision, it is in respect to the practical result: is the outcome of the enforcement of the foreign decision in accordance with the fundamental policies and views of the US Public Policy, or not. If not, well the decision must be rejected. However, the twist in this case is that the methodology is applied in a reversed way: is the outcome of the non-enforcement of the annulled award in accordance with the fundamental policies and views of the US Public Policy, or not. Not the enforce the award would have as result a de facto expropriation of Commisa’s contractual claims. However, the main issue is that things are far more complicated. Mexican courts never ruled about the legitimacy of Commisa’s claims, but only over the arbitral tribunal’s jurisdiction, with the conclusion that only federal courts are competent to take a decision. Actually, it is not relative to a so-said expropriation, it is about arbitrability. Do arbitrators have jurisdiction in accordance to an arbitration agreement that is illegal regarding one of the parties, which still did sign it, in particular, when that party is a state entity? The answer is unequivocally yes. Most tribunals consider that it is a principle that States’ companies cannot allege a prohibition they have deliberately overseen when they signed the arbitration agreement. This principle has been so often stated and applied that it is to be considered as a material rule of private international law whose observance emerged in international arbitration. The Second Circuit confirms it!
 Ad Hoc, Elf Aquitaine vs NIOC, Preliminar Award, 14/01/1982; CCI, Framatome and others v The Atomic Energy Organisation of Iran, 30/04/1982.
 Ad Hoc, Benteler vs Belgique, 18/11/1983; Civ1., 02/05/1966, JDI, 1966.648, Level.