Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we cover the Second Circuit’s recent decision to affirm in part and remand in part the Southern District of New York's (SDNY) ruling, declining to enforce a $1.8 billion (plus interest) international arbitral award. The arbitral award at issue was previously set aside in part by a Nigerian court. Relying on the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"), the district court concluded that the Nigerian court’s ruling was not contrary to principles of justice and therefore the Nigerian court’s ruling was entitled to comity in the US. The Second Circuit's decision also signals a move away from the Court’s analysis under Pemex. Instead, it has moved to affording more deference to foreign courts' decisions to set aside arbitral awards. Additionally, the court emphasized its preference to follow a foreign court’s decision to enforce or set aside a judgment unless the decision is contrary to US public policy.
The dispute in the case relates to an oil production agreement between Esso Exploration and Production Nigeria Limited and Shell Nigeria Exploration and Production Company Limited (collectively, Esso) and the Nigerian National Petroleum Corporation (NNPC) to produce oil at a Nigerian owned oil field. Id. at 4. Esso argued that NNPC was taking more oil than NNPC was allowed under the contract. Id. Esso filed an arbitration demand against NNPC and the Nigerian arbitral panel ruled in favor of Esso, awarding $1.8 billion plus interest. Id. The panel rejected NNPC’s argument that the dispute was inarbitrable because it concerned tax issues. Id. at 10-11.
Prior to the panel's award, Nigeria's tax authority filed a lawsuit in Nigerian court to enjoin the arbitration. Id. at 11. The court concluded the dispute was not arbitrable because of tax issues. Id. After the arbitral panel issued its award, and along with the tax litigation, NNPC moved to set aside the award. A few months later, the Nigerian court nullified the entire award. Id. The court concluded that key issues in the arbitration involved tax obligations, which could not properly be resolved in an arbitration proceeding. Id.
Esso appealed both Nigerian court rulings. The Nigerian Court of Appeal affirmed the lower court’s ruling to set aside the award with respect to the tax issues, but denied the lower court’s ruling to set aside the award on other grounds, finding the tax issues to be severable from the other contract-based claims. Id. at 11-12.
With various appeals pending in Nigeria, Esso simultaneously filed a suit with the SDNY to enforce the award against NNPC under the New York Convention. Id. at 13. The New York Convention governs the enforcement of arbitral awards. Id. at 6. The U.S and Nigeria are both signatory states to the Convention.
Under the New York Convention, a country that enters an arbitral award is considered to have “primary jurisdiction” over the award. Id. Courts in the primary jurisdiction have discretion to enforce or set aside the award. NY Convention art. V., 1(e) (the award may be “set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made”). All other signatory states, referred to as “secondary jurisdictions” are permitted to decide whether to enforce the award. Id. at 6; NY Convention art. V., (2)(b) (“recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that … the recognition or enforcement of the award would be contrary to the public policy of that country”). The Second Circuit has previously described the New York Convention as having a "pro-enforcement bias," which is rooted in the notion that foreign jurisdictions are afforded comity in their judgments. Corporacion Mexicana de Mantemimiento Integral, S. de R.L. de C.V. v. Pemex-Exploracion y Produccion, 832 F.3d 92, 105-06 (2d Cir. 2016) ("Pemex"). Therefore, secondary jurisdictions should generally enforce an arbitral award entered in a primary jurisdiction unless an exception applies.
Article V of the New York Convention outlines the various exceptions. N.Y. Convention art. V(1). Relevant in this case, is the exception that applies when the award "has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made." Id. at 5-6, 25; N.Y. Convention art. V., 1(e). The Second Circuit has "treated a primary jurisdiction's decision to set aside an arbitral award as conclusive, binding the US court from which enforcement is sought." Id. at 6. As a result, the Second Circuit will "decline to enforce an award that has been set aside in the primary jurisdiction unless the judgment that set it aside is 'repugnant' to US policy." Id.
NNPC also filed a motion to dismiss, alleging lack of personal jurisdiction and forum non conveniens, as well as arguing the petition should be dismissed since the Nigerian Court set aside the award. Id. The SDNY denied the motion to dismiss, but agreed that Esso’s petition to enforce the award should be denied in full because the Nigerian Court nullified the award, and Nigeria was owed comity under the Convention and Second Circuit precedent. Id. The district court relied on the Second Circuit's decision in Pemex, which identified several factors the court should consider in deciding whether to extend comity to a foreign judgment. Id. at 15. These factors include: "(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." Id. at 26. In Pemex, the Second Circuit enforced an arbitral award that had been set aside by the foreign state.
Esso appealed the district court's ruling on the arbitral award and NNPC cross appealed. The Second Circuit agreed with the district court's ruling on the motion to dismiss. District court determinations on personal jurisdiction are reviewed for "clear error" with respect to factual findings and "de novo" for legal findings. Id. at 18. The Second Circuit agreed with the district court that “NNPC is an alter ego of Nigeria” and was therefore, not entitled to rights under the Due Process Clause, and the other requirements to establish personal jurisdiction were met. Id. at 18-19. The court also affirmed the district court’s ruling on NNPC’s forum nonconveniens claim. The district court’s ruling can be reversed only where there is an “error of law or clearly erroneous factual finding.” Id. at 21. Esso's choice of forum in the US was entitled deference and NNPC did not make a “persuasive argument identifying error in the factual or legal components of the district court’s discretionary decision." Id. at 23.
On the arbitral award, the Second Circuit reviews the district court’s decision "to extend or deny comity to a foreign judgment for abuse of discretion." Id. at 25. Additionally, legal conclusions are reviewed de novo and factual findings are reviewed for clear error. Id.
The court disagreed with SDNY's strict application of the Pemex factors and clarified that the Pemex factors are not required in every instance, indicating that a "more expansive analysis" should be applied. Id. at 16. Going forward, the question should be whether the foreign judgment is "repugnant to fundamental notions of what is decent and just in the United States." Id. at 23. In addition to the Pemex factors, district courts may, and should, consider other factors relevant to the circumstances of a particular case." Id.
Despite concluding that the Pemex factors do not need to be strictly applied, the court reiterated that the Pemex standard should not "be understood as easy to meet" and "the public policy exception to the principle of comity ‘does not swallow the rule: the standard is high, and infrequently met.'" Id. at 27. Additionally, courts should "act with trepidation and reluctance in enforcing an arbitral award that has been declared a nullity by the courts having jurisdiction over the forum in which the award was rendered." Id. at 27. "In the absence of a clear adverse effect on these fundamental public policy concerns, comity stands firmly as our guiding value." Id.
The court concluded that Esso did not meet its burden to show that the Nigerian court's ruling is "repugnant to fundamental notions of justice" in the US, and thus comity should be applied to the portion of the award that was set aside by the Nigerian court. Id. at 27. The role of the secondary jurisdiction "is not to second-guess the Nigerian court's substantive determinations made under Nigerian law. We assess the court's rulings only so far as is required to ascertain whether they are plainly incompatible with US notions of justice." Id. at 28.
Applying the Pemex factors, the court concluded the "Nigerian judgments are [not] so facially deficient in their substantive analysis that they merit no respect." Id. at 29. However, the portion of the award that was not set aside by the Nigerian court should be enforced in the US Id. The district court did not properly distinguish between these two portions of the award, and therefore the Second Circuit remanded the case for the district court to evaluate the effect of the viable portion of the Nigerian award.
The Second Circuit's decision represents a shift back to pre-Pemex principles governing the enforcement of arbitral awards. The court moved away from the strict factors articulated in Pemex in favor of a more comprehensive analysis of the circumstances surrounding a foreign jurisdiction's decision to enforce or set aside an arbitral award. Additionally, the court emphasized its preference to follow a foreign court’s decision to enforce or set aside a judgment unless the decision is contrary to US public policy.
As a result of this decision, parties drafting arbitration agreements should be cautious of political risk and think carefully before selecting a seat of arbitration and governing law. We have substantial experience with seeking recognition of and/or enforcing arbitral awards. If we can be of any assistance, please feel free to contact us.
