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Corporacion Mexicana De Mantenimiento Intergral, S. De R.L. De C.V. v. Pemex-Exploracion Y Produccion

United States District Court, S.D. New York

August 27, 2013

CORPORATIÓN MEXICANA DE MANTENIMIENTO INTEGRAL, S. DE R.L. DE C.V., Petitioner,
v.
PEMEX-EXPLORACIÓ N Y PRODUCTIÓN, Respondent

For Corporacion Mexicana De Mantenimiento Intergral, S. De R.L. De C.V., Petitioner: James Evan Berger, LEAD ATTORNEY, Christopher F. Dugan, Paul Hastings LLP (NY), New York, NY; Kana Ellis Caplan, Richard T. Marooney, Jr, LEAD ATTORNEYS, King & Spalding LLP (NYC), New York, NY; Charles C. Correll, JR, PRO HAC VICE, King & Spalding LLP (SF), San Francisco, CA; Jeffrey S. Bucholtz, King & Spalding LLP, Washington, DC.

For Pemex-Exploracion Y Produccion, Respondent: Dennis H. Tracey, III, LEAD ATTORNEY, Ira Martin Feinberg, Hogan Lovells U.S. LLP (nyc), New York, NY; Richard C. Lorenzo, LEAD ATTORNEY, PRO HAC VICE, Hogan Lovells U.S. LLP (miami), Miami, FL; Jordan Lancaster Estes, Hogan Lovells LLP, New York, NY; Peter Joseph Dennin, Hogan & Hartson L.L.P. (NYC), New York, NY.

OPINION

Page 643

OPINION AND ORDER GRANTING PETITIONER'S MOTION TO CONFIRM ARBITRATION AWARD AND DENYING RESPONDENT'S MOTION TO DISMISS PETITION

ALVIN K. HELLERSTEIN, United States District Judge.

I. INTRODUCTION

Generally, arbitration awards issued in one nation can be enforced by judgments and executions granted by the courts of another nation. However, arbitration awards also can be nullified, and if nullified by the courts of the nation in which, or according to the law of which, the arbitration was conducted, a conflict is created for the courts of other nations. Which is to be given primacy, the award or the nullifying judgment?

This is the issue of the case. After a vigorously contested arbitration, a panel of arbitrators in Mexico City issued an award (the " Award" ) in favor of petitioner, Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (" COMMISA" ). The Award, with interest, is now worth almost four hundred million U.S. dollars. COMMISA obtained judgment in this court confirming the Award. Respondent, PEMEX-Exploración y Producción (PEP), an instrumentality of Mexico, continued to resist, appealing from the judgment to the Second Circuit of Appeals, and filing litigation proceedings in the Mexican courts to nullify the Award.

PEP was successful in the Mexican courts. On September 21, 2011, the Eleventh Collegiate Court on Civil Matters of the Federal District (the " Eleventh Collegiate Court," generally equivalent in hierarchy and authority to the U.S. Court of Appeals for the D.C. Circuit) issued a 486-page decision that held that the Award was invalid. It reversed the Mexican district court, and remanded the case to it to issue a judgment in favor of PEP. On October 25, 2011, the district court issued such a judgment with its own 46-page opinion.

The Eleventh Collegiate Court held that arbitrators are not competent to hear and decide cases brought against the sovereign, or an instrumentality of the sovereign, and that proper recourse of an aggrieved commercial party is in the Mexican district court for administrative matters. Hence, it nullified the Award. The court based its decision in part on a statute that was not in existence at the time the parties' entered their contract,

Page 644

and the decision left COMMISA without the apparent ability to obtain a hearing on the merits of its case.

In response to that decision and its finality, the Second Circuit Court of Appeals remanded the case to me to address the effect that the decree of nullification should have on the Award and on my judgment confirming the Award. Following remand, I received further briefing from the parties, heard arguments on the complex issues that were presented, and conducted a three-day trial of the parties' experts on Mexican law. This decision reflects my findings and conclusions.

I hold, for the reasons discussed below, that the Eleventh Collegiate Court decision violated basic notions of justice in that it applied a law that was not in existence at the time the parties' contract was formed and left COMMISA without an apparent ability to litigate its claims. I therefore decline to defer to the Eleventh Collegiate Court's ruling, and I again confirm the Award and grant judgment thereon.

II. FACTUAL AND PROCEDURAL BACKGROUND

a. The Parties and Their Agreements

Under the Political Constitution of the United Mexican States, all petroleum and hydrocarbons in Mexico belong to the state. State-owned Petróleos Mexicanos (" PEMEX" ) controls and manages those resources. PEP, based in Mexico City, is the PEMEX subsidiary responsible for oil and natural gas exploration and production. COMMISA, a Mexican corporation, is a subsidiary of KBR, Inc., a construction company and military contractor incorporated in Delaware and headquartered in Houston, Texas.

In October 1997, PEP and COMMISA entered into a contract (the " October 1997 Contract" ) for COMMISA to build and install two offshore natural gas platforms in the Bay of Campeche, in the southerly part of the Gulf of Mexico. Among other provisions, the October 1997 Contract includes: (i) a clause providing that the contract is governed by Mexican law; [1] (ii) a clause providing for any dispute to be settled through arbitration conducted in Mexico City in accordance with the Conciliation and Arbitration Regulations of the International Chamber of Commerce (" ICC" ); [2] (iii) a clause allowing PEP to rescind the contract (i.e., issue an administrative rescission) if COMMISA failed to comply with certain obligations under the contract; [3] and (iv) a clause requiring COMMISA

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to obtain a performance bond guaranteeing its contractual obligations.[4]

In May 2003, PEP and COMMISA entered into a related contract (the " May 2003 Contract" and together with the October 1997 Contract, the " Contracts" ). Like the October 1997 Contract, the May 2003 Contract is governed by Mexican law and provides for both arbitration and administrative rescission by PEP. Ex. 4 at § § 9.2, 19.1, 19,3.

The parties' arbitration agreement was made pursuant to the PEMEX enabling statute, which also applied to PEP as a subsidiary of PEMEX. The Organic Law by which PEMEX was organized as a wholly-owned, government entity, contemplated the possibility of arbitration. Section 14 of the PEMEX and Affiliates Organic Law provides: " In the event of international legal acts, Petróleos Mexicanos or its Affiliates may agree upon the application of foreign law, the jurisdiction of foreign courts in trade matters, and execute arbitration agreements whenever deemed appropriate in furtherance of their purpose." Ex. MMM at 443. The PEMEX law was passed following the enactment, in 1994, of the North American Free Trade Agreement (" NAFTA" ), which sought to encourage investment in Mexico by providing for the arbitration of international disputes. See Evidentiary Hearing Tr. 39:4-25; North American Free Trade Agreement, U.S.-Can.-Mex., Dec. 17, 1992, 32 I.L.M. 289 (1993), art. 1115, 2022.

b. COMMISA's Judicial Challenge to PEP's Administrative Rescission

On March 29, 2004, after each party charged the other with breaching contractual obligations, PEP notified COMMISA that it intended to administratively rescind the Contracts. However, before doing so, PEP and COMMISA engaged in conciliation efforts, attempting to resolve their disputes amicably. On December 1, 2004, conciliation having failed, COMMISA filed a demand for arbitration with the ICC. Two weeks later, on December 16, 2004, PEP gave COMMISA notice that it was proceeding by administrative rescission.

COMMISA responded by filing a petition for an indirect amparo[5] with the Fourteenth District Court on Administrative Matters for the Federal District (" Fourteenth District Court" ) on December 23, 2004.[6] COMMISA alleged that PEP's administrative rescission was untimely and that the statutes on which it

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was based were unconstitutional and inapplicable to the parties' dispute. The Fourteenth District Court held that the administration rescission by PEP was not an act of public authority and thus an amparo was not the proper procedure to challenge the rescission and, on August 23, 2005, dismissed COMMISA's petition.

COMMISA appealed the district court's decision to the Sixth Collegiate Court on Administrative Matters of the First Circuit (" Sixth Collegiate Court" ). The Sixth Collegiate Court reversed on May 17, 2006, holding that PEP's administrative rescission was an act of public authority, and that an amparo proceeding was a proper way to challenge it. The Sixth Collegiate Court referred the issue of the administrative rescission statutes' constitutionality to the Mexican Supreme Court, the highest court in Mexico.

On June 23, 2006, the Mexican Supreme Court held that the administrative rescission statutes were constitutional. The court ruled that state agencies had a " special privilege" to promote the public good, and that administrative rescissions fell within this privilege. Ex. LLL at 58-60. Administrative rescission did not violate the Mexican Constitution's guarantee of right of access to the courts because " there is no obstacle or restriction whatever against a private party . . . [filing] within the relevant time periods . . . an administrative dispute proceeding, thereby triggering intervention by the relevant court, if [the aggrieved party] . . . has been adversely affected by the cancellation of the administrative contract for public works to which it was a party." Id. at 71. Pursuant to Article 52(I) of the Organic Law of the Judiciary, the Supreme Court held, the federal district courts for administrative matters (the " District Courts for Administrative Matters" ) had jurisdiction to hear and resolve contractual disputes arising from administrative rescissions. The Supreme Court did not discuss whether arbitrators could hear issues of administrative rescission if the parties' contracts provided that all disputes arising from the contract should be resolved by arbitration.

The Mexican Supreme Court remanded the case to the Sixth Collegiate Court to consider COMMISA's non-constitutional claims that the administrative rescission statutes were inapplicable and that the administrative rescission was untimely. On February 23, 2007, the Sixth Collegiate Court held that PEP had properly followed the administrative rescission statutes and that the rescission was timely. The court dismissed COMMISA's petition for an amparo against PEP's issuance of an administrative rescission.

Thus, under Mexican law, a state instrumentality like PEP could respond to a contract dispute by issuing an administrative rescission of the contract. The private party could then litigate the contract issues in the appropriate Mexican district court. However, the Mexican courts did not rule on the issue of arbitrability. What would be the implications of an agreement between a government-owned party and a private party to arbitrate all of their disputes including, presumably, a dispute involving not only the conduct claimed to constitute the breach of contract, but also the action of the government-owned party to rescind the contract? That issue was left for future resolution by the arbitrators and by the Mexican courts.

c. The Initiation of Arbitration and the Challenge to Its Jurisdiction

While the amparo proceedings unfolded, the ICC Tribunal was formed pursuant to COMMISA's demand for arbitration issued December 1, 2004. PEP promptly attacked the arbitrators' jurisdiction, arguing that (i) the arbitration clause was not worded broadly enough to cover the specific dispute at issue, (ii) that COMMISA

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had not properly exhausted alternative remedies prior to seeking arbitration, and (iii) that COMMISA had waived its right to arbitration by pursuing remedies in the courts. Notably, PEP did not argue at the time that arbitration was an improper forum for deciding disputes related to administrative rescissions. See Ex. 87 at 12-16. On November 20, 2006, the ICC Tribunal issued a unanimous award (the " Preliminary Award" ) holding that PEP's arguments lacked merit and that the arbitration panel had jurisdiction over all the issues in dispute Id. at 81.

Following the Preliminary Award, PEP moved for reconsideration, arguing again that the arbitration panel lacked jurisdiction, PEP contended in a March 28, 2007 filing that the recent decisions of the Mexican Supreme Court and the Sixth Collegiate Court deprived the panel of jurisdiction. PEP argued, since the administrative rescission had been held proper by the Mexican courts, the doctrine of res judicata barred the panel from hearing the parties' dispute. The panel denied PEP's motion, ruling, in a May 18, 2007 order, that it retained jurisdiction to hear the merits of the dispute, subject to a final resolution of the issue in the final award. Ex. 116; Ex. 1A at 18.

On October 8, 2007, PEP again filed a motion with the arbitration panel, arguing once more that res judicata barred the action and that COMMISA had waived its right to arbitration by filing the amparo proceeding in the Mexican courts. PEP now added an additional argument: that the administrative rescission was an " act of authority" and could not be arbitrated " since these matters are not subject to arbitration." Ex. 117 at 2. The panel disagreed and, on November 12, 2007, issued an order reaffirming its earlier decision that it could hear the merits, subject to a ruling on the issue of jurisdiction in its final award.

PEP, noting its objection, continued to participate in the arbitration proceedings. PEP did not seek to appeal the Preliminary Award or the subsequent rulings of the arbitration panel, even though PEP had the right to do so under Article 1432 of Mexico's Commercial Code.[7]

d. Changes in Mexican Law Relating to Public Authorities

As the arbitration between COMMISA and PEP proceeded, Mexican law changed in material ways. Under a statute that took effect December 7, 2007, litigation relating to issues of compliance with the requirements of public contracts was to be litigated in a special administrative court that was established to hear tax and financial matters. Article 14(VII) of the Organic Law ...


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