United States District Court, S.D. New York
ECOPETROL S.A., and KOREA NATIONAL OIL CORPORATION, Petitioners and Cross-Respondents,
OFFSHORE EXPLORATION AND PRODUCTION LLC, Respondent and Cross-Petitioner
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For Ecopetrol S.A., Petitioner: Allison Marie Stowell, Scott Adam Chesin, Mayer Brown LLP (NY), New York, NY; Pablo Cesar Ferrante, William H. Knull, III, Mayer Brown LLP, Washington, DC.
For Korea National Oil Corporation, Petitioner: Anthony Jan-Huan Sun, Mark Putnam Gimbel, Covington & Burling LLP(NYC), New York, NY; Miguel Antonio Lopez Forastier, Covington & Burling, L.L.P. (DC), Washington, DC; William H. Knull, III, Mayer Brown LLP, Washington, DC.
For Offshore Exploration and Production, LLC, Respondent: David M Orta, Derek Lawrence Shaffer, Quinn Emanuel Urquhart & Sullivan, LLP, Washington, DC; Julia Jordan Peck, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY; Peter E. Calamari, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, NY.
OPINION AND ORDER
John G. Koeltl, United States District Judge.
The pending petitions in this case arise out of a Stock Purchase Agreement governing the sale of certain entities by Respondent Offshore Exploration and Production, LLC (" Offshore" ), to Petitioners, Ecopetrol S.A. (" Ecopetrol" ) and Korea National Oil Corporation (" KNOC" ). The Stock Purchase Agreement requires tat Offshore hold Ecopetrol and KNOC (together, the " Purchasers" ) harmless against various taxes assessed against the entities that the Purchasers acquired. The Stock Purchase Agreement also requires that Offshore pay any taxes that the acquired entities contest prior to or upon the commencement of any contest proceedings, and that the parties arbitrate disputes arising out of or related to the Stock Purchase Agreement.
After Offshore objected to indemnification claims for over $75 million in tax liabilities assessed against an entity that the Purchasers acquired pursuant to the Stock Purchase Agreement, the parties arbitrated Offshore's liability under the Stock Purchase Agreement. On April 15, 2013, the arbitral panel issued an Interim Award requiring that Offshore reimburse the Purchasers for the full amount of those indemnification claims. Offshore attempted to satisfy the Interim Award with funds placed in escrow pursuant to the Stock Purchase Agreement; however, the Purchasers objected and sought a supplemental award declaring that Offshore's attempt to satisfy the Interim Award with escrowed funds was ineffective. On December 3, 2013, the arbitral panel issued a Supplemental Interim Award concluding that Offshore was not permitted to satisfy the Interim Award with escrowed funds.
The Purchasers now seek to confirm the Interim Award and the Supplemental Interim Award, and to have the awards entered as a judgment of this Court under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the " Convention" ), and the Federal Arbitration Act (" FAA" ), 9 U.S.C. § 207. Offshore opposes confirmation of both arbitral awards, and also petitions to vacate the Supplemental Interim Award.
This Court has jurisdiction under the Convention, 9 U.S.C. § 203, and under 28 U.S.C. § 1332 based on diversity of citizenship. For the reasons explained below, the Purchasers' petition to confirm the Interim Award and Supplemental Interim Award is granted, and Offshore's cross-petition to vacate the Supplemental Interim Award is denied.
The Court assumes the parties' familiarity with the factual background and procedural history set forth in connection with the parties' previous cross-motions for declaratory judgment and for a stay pending arbitration in
Offshore Exploration & Prod. LLC v. Morgan Stanley Private Bank, N.A., 986 F.Supp.2d 308 (S.D.N.Y. 2013) (" Offshore I" ). The following facts are accepted as true for purposes of the pending motions.
On December 29, 2008, Offshore entered into a Stock Purchase Agreement with the Purchasers. Pursuant to the Stock Purchase Agreement, Offshore sold to the Purchasers all of the issued and outstanding common stock of its subsidiary, Offshore International Group, Inc., and each of Offshore International Group's subsidiaries. Under the Stock Purchase Agreement, Offshore must " indemnify and defend the Purchaser Indemnitees and hold the Purchaser Indemnitees harmless from and against" various taxes that the subsidiaries might owe. (Stock Purchase Agreement (" SPA" ) § 7.4(a).) The Stock Purchase Agreement also states that if contested taxes " must be paid under applicable Law prior to or upon commencement of a contest proceeding, [Offshore] shall pay such Taxes to the applicable Governmental Authority prior to or upon commencement of such proceeding." (SPA § 7.4(d).)
In order to secure the Purchasers' potential indemnification claims under the Stock Purchase Agreement, the Purchasers delivered $150 million of their $1.2 billion purchase price to an escrow agent: Morgan Stanley Trust, N.A. (" Morgan Stanley" ). (First Amendment to the SPA § 2.3(b)(i).) The Purchasers may apply the escrowed funds to various indemnification claims arising under the Stock Purchase Agreement and funds are to be disbursed " in accordance" with the terms of the Escrow Agreement to which Offshore, the Purchasers, and Morgan Stanley were parties. (First Amendment to the SPA § 2.3(b)(i).) The Stock Purchase Agreement requires that the escrow period be extended and that an adequate amount in escrow be retained to cover any indemnification claim timely asserted. (First Amendment to the SPA § 2.3(b)(i).)
Additional rights and procedures regarding disbursement from the escrow are enumerated in Section 8.6 of the Stock Purchase Agreement. That section provides that " [b]y written notice to Seller specifying in reasonable detail the basis for set-off, Purchaser may assert a claim to set off any amount to which it is or[,] if Seller has objected[,] has been determined to be[,] entitled under Article 7 and . . . Article 8 against the Escrow Amount." (SPA § 8.6.) Section 8 also provides that " [n]either the exercise of nor the failure to exercise such right of set-off will constitute an election of remedies or limit Purchaser in any manner in the enforcement of any other remedies that may be available to it." (SPA § 8.6.)
In the event that any party breaches its obligations under the Stock Purchase Agreement, the Agreement provides to the non-breaching party " the right to seek specific performance of this Agreement without the necessity of proving the inadequacy of money damages as a remedy." (SPA § 8.4.) Additionally, the Stock Purchase Agreement contains a broad, mandatory arbitration clause providing that:
Any dispute, controversy or Action arising out of or relating to this Agreement, or the breach thereof . . . shall be determined by arbitration administered by the American Arbitration Association in accordance with its International Arbitration Rules.
SPA § 10.7(a).) The Stock Purchase Agreement also provided for the enforcement
of provisional remedies granted by the arbitrators:
[T]he arbitrators shall have the power to grant any provisional measures that they deem appropriate including but not limited to provisional injunctive relief, and any provisional measures ordered by the arbitrators may, to the extent permitted by applicable law, be deemed to be a final award on the subject matter of the measures and shall be enforceable as such.
(SPA § 10.7 (b).)
Offshore and the Purchasers signed the First Amendment to the Stock Purchase Agreement as of February 5, 2009. (First Amendment to the SPA.) Offshore, the Purchasers, and Morgan Stanley also executed the Escrow Agreement as of February 5, 2009. The Escrow Agreement provides procedures for the disbursement of funds held in escrow (the "Escrow Amount" ). Disbursement must occur if any Purchaser submits a Purchaser's Indemnity Certificate and Offshore does not object within thirty days. (Escrow Agreement § 3.) However, if Offshore disputes a claim made against the Escrow Amount, Morgan Stanley is prohibited from disbursing funds:
except in accordance with either (i) written instructions executed both by an authorized officer of Purchaser and by an authorized officer of Seller (" Joint Instructions" ), or (ii) a certificate delivered by any Purchaser to the Escrow Agent, executed by an authorized officer of such Purchaser (a " Final Award Certificate" ) . . . .
(Escrow Agreement § 3.) A Final Award certificate must include the amount of the contested amount to which the Purchaser is entitled and an " Arbitral Award" confirming the Purchaser's entitlement. (Escrow Agreement § 3.) Morgan Stanley is also required to release escrow funds to Offshore when any Purchaser " delivers to the Escrow Agent a certificate of such Purchaser . . . [stating] that an Indemnification Item, in a specific amount, was satisfied by Seller independent of this Indemnification Escrow Agreement . . . ." (Escrow Agreement § 3.)
The Escrow Agreement provides that:
In the event that the Escrow Agent shall be uncertain as to its duties or rights . . . it shall be entitled to refrain from taking any action . . . until it shall be directed otherwise in writing by all of the other Parties hereto, by a final order or judgment of a court of competent jurisdiction or, subject to Section 3 of this Indemnification Escrow Agreement, a final decision of an arbitral tribunal pursuant to Section 10.7 of the Stock Purchase Agreement.
(Escrow Agreement § 5(b).)
The Escrow Agreement contains a non-exclusive forum selection clause providing that each party " irrevocably waives any objection on the grounds of venue, forum non-conveniens or any similar grounds and irrevocably consents to service of process by mail or in any other manner permitted by applicable law and consents to the jurisdiction of the courts located in the State of New York." (Escrow Agreement § 12.) The Agreement also contains a merger clause, which states that " [i]n the event of any discrepancy or inconsistency between the provisions of this Indemnification Escrow Agreement and the provisions of the Stock Purchase Agreement, the provisions [in the Escrow Agreement] shall prevail and be deemed to reflect the intent and understanding of the Parties hereto." (Escrow Agreement § 12.) Any funds remaining in escrow, and not required to be retained in escrow pursuant to Section 2.3(b)(i) of the Amended Stock Purchase
Agreement, were to be released to Offshore on February 5, 2011. (Escrow Agreement § 4.) Both the Escrow Agreement and Stock Purchase Agreement are to be interpreted under New York law. (Escrow Agreement § 12; SPA § 10.6.)
Among the Offshore subsidiaries that the Purchasers acquired under the Stock Purchase Agreement is a Peruvian oil company, Savia Peru S.A. (" Savia" ).
Between February 25, 2010, and January 28, 2011, the Purchasers made several indemnification claims under Section 7.4 of the Stock Purchase Agreement for tax liabilities that Savia allegedly owed to the Peruvian government. The Purchasers' indemnification claims ultimately totaled $75,308,179.03. With respect to each claim, the Purchasers delivered to Morgan Stanley a claim certificate that elaborated the Purchasers' indemnification claim and requested that Morgan Stanley promptly contact Offshore to ascertain whether Offshore objected to the Purchasers' disbursement request. Offshore objected to each disbursement request because it contested whether the Purchasers' claims were valid in light of the Purchasers' alleged failure to keep Offshore informed of the Peruvian tax proceedings, and to tender to Offshore control of the Peruvian tax proceedings. (Cross-Petition to Vacate the Supplemental Interim Award (" Cross-Petition" ) ¶ 10.)
After the Purchasers, through Savia, paid $75,308,179.03 to the Peruvian Government, the Purchasers sought through arbitration an interim award ordering Offshore to specifically perform its alleged duty to reimburse the Purchasers for that amount. On April 15, 2013, the arbitration panel issued an interim award (the " Interim Award" ) ordering Offshore to pay to the Purchasers within thirty days the full amount that the Purchasers sought. (Chesin Decl., Ex. A (" Interim Award" ) at 7.) While the award required " reimbursement," it did not specify whether reimbursement was to come from the Escrow Amount. (Interim Award at 7.)
Abandoning its prior objections, on May 2, 2013, Offshore instructed Morgan Stanley to release $75,308,179.03 from the Escrow Amount to the Purchasers. With the benefit of the arbitration award, the Purchasers no longer sought to have that amount paid from the Escrow Amount. On May 10, 2013, the Purchasers objected to the disbursement of funds from the Escrow Amount. According to the Purchasers, Morgan Stanley was prohibited from disbursing funds because, under Section 3 of the Escrow Agreement, Offshore's initial objection to disbursement of funds from the Escrow Amount precluded Morgan Stanley from releasing any funds until the Purchasers submitted Joint Instructions with Offshore or the Purchasers delivered a Final Award Certificate. The Purchasers maintained that they were under no obligation to submit Joint Instructions or to deliver a Final Award Certificate because, under Section 8.6 of the Stock Purchase Agreement, the Purchasers initial decision to seek payment from the Escrow Amount did not constitute an election of remedies or in any way limit ...