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Mexican Annulment of an Mexican Award violates US basic Notions of Justice

In a recent US decision[i], a very harsh debate was held about arbitration under Mexican Law and the way Mexican tribunals consider the arbitrability of controversies involving State instrumentalities.


In October 1997 Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. ("COMMISA") entered into a contract with PEMEX-Exploración y Producción (PEP), an instrumentality of Mexico and subsidiary of PEMEX, for COMMISA to build and install two offshore natural gas platforms in the Gulf of Mexico. On March 29, 2004, after each party charged the other with breaching contractual obligations, PEP notified COMMISA that it intended to administratively rescind the contract.

First proceedings
COMMISA responded by filing a petition for a constitutional challenge (“amparo”) alleging that PEP's administrative rescission was untimely and that the statutes on which it 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.[ii] On appeal, the Sixth Collegiate Court on Administrative Matters of the First Circuit reversed holding that PEP's administrative rescission was an act of public authority, and that an amparo proceeding was a proper way to challenge it.[iii] Then the Supreme Court ruled that the federal courts had jurisdiction to hear and resolve contractual disputes arising from administrative rescissions but without discussing 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.[iv] On remand, the Sixth Collegiate Court held that PEP had properly followed the administrative rescission statutes and that the rescission was timely. Consequently, the court dismissed COMMISA's petition for an amparo against PEP's issuance of an administrative rescission.[v]
While the amparo proceedings unfolded, the ICC Tribunal was formed pursuant to COMMISA's demand for arbitration issued December 1, 2004.

The arbitration proceeding
PEP objected to the proceeding as it considered that the administrative rescission was an "act of authority" and could not be arbitrated "since these matters are not subject to arbitration." The panel disagreed and, on November 12, 2007, issued an order 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 challenge the Preliminary Award or the subsequent rulings of the arbitration tribunal, even though PEP had the right to do so under Article 1432 of Mexico's Commercial Code. Finally, on December 16, 2009, an almost 350,000,000 USD Award with interests was handed down in favor of COMMISA.

The annulment proceeding
PEP then sought the annulment of the award in the Fifth District Court on Civil Matters for the Federal District ("Fifth District Court") in Mexico City. That action was dismissed on June 25, 2010, partially on substantive grounds. The Fifth District Court held that PEP had waived its argument of non-arbitrability by failing to object timely to the panel's Preliminary Award. As an alternative ground of dismissal, the Fifth District Court held that the Award did not violate public policy; it "in no way affect[ed] public peace or the interests and principles governing the national community," but involved only "individual interests arising from a commercial relationship existing between the parties."[vi]

The amparo proceeding
PEP then filed a petition for an indirect amparo in the Tenth District Court on Civil Matters in the Federal District ("Tenth District Court") to challenge the decision of the Fifth District Court. Again, PEP failed. On October 27, 2010, the Tenth District Court dismissed PEP's action. The Tenth District Court agreed with the Fifth District Court that the parties' contractual agreement had a broad arbitration clause that covered all claims of damages arising from both the breach of contract and from the administrative rescission. The Tenth District Court ruled that the organic law that established PEMEX authorized it and its subsidiaries (including PEP) to arbitrate its disputes, and "an Arbitral Tribunal indeed has powers to address the grounds, context and contract effects of a rescission for they are private in nature."[vii]

The Eleventh Collegiate Court’s final ruling
PEP appealed to the Eleventh Collegiate Court for the Federal District. This time it succeeded. On August 25, 2011, a three-judge panel of the Eleventh Collegiate Court reversed, and ordered amparo relief in favor of PEP. Its 486-page opinion, issued September 21, 2011, held that public policy was implicated because administrative rescissions are "issued to safeguard financial resources" of the State. The second argument relied on by the Eleventh Collegiate Court was a 1994 decision of the Mexican Supreme Court.[viii] That decision, which did not discuss arbitration, had described administrative rescissions as "acts of authority." And under the statute that took effect December 2007, litigation relating to issues of compliance with the requirements of public contracts was to be litigated in the special administrative court that had been established to hear tax and financial matters. Hence taking into account that "acts of authority" should not be arbitrated, the Eleventh Collegiate Court held, the arbitrators that heard the dispute were without jurisdiction. As to the organic law by which PEMEX was organized and which authorized it to enter into arbitrations, the Eleventh Collegiate Court ruled that since PEMEX could have arbitrated the case if it had not declared an administrative rescission, there was no conflict between its decision and the organic law. Furthermore, the issues arising from PEP's administrative rescission, and COMMISA's claims for breach of contract, were intertwined and inseparable, and since the arbitration panel lacked jurisdiction to hear the issues arising from the administrative rescission, it was barred as well from hearing the issues arising from the breach of contract.

The US District Court´s ruling
Now, following the District Court for the Southern District of New York’s opinion, when COMMISA initiated arbitration, it had every reason to believe that its dispute with PEP could be arbitrated. Twice PEP had signed an agreement stating that disputes related to the gas platforms contracts would be arbitrated. PEP had the authority to enter into such an arbitration provision, as the organic law that gave PEP its existence, specifically authorized it to resolve commercial disputes by arbitration. Indeed, it was not until the 2007 Statute, that there was a source of law that supported the argument that the parties' dispute was not arbitrable. Judge Hellerstein goes on observing that the purpose of the 2007 law, according to the Eleventh Collegiate Court, was "to protect the economy and public expenditure by abandoning the practices that were aimed at granting more participation to private parties than to the State." It therefore followed that it "would be contrary to public policy" to allow PEP, an entity that was so important to the public expenditure, to be subject to a dispute resolution procedure governed by private parties. The Eleventh Collegiate Court stated that it was not applying the law retroactively, but only as a "guiding principle," and that a 1994 Mexican Supreme Court decision supported its conclusion. However, the 1994 decision did not mention anything about arbitration. Thus, the District Court concludes that retroactive application of laws and the unfairness associated with such application are reasons, which must lead to reject the Mexican annulment decision: “Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted. For that reason, the principle that the legal effect of conduct should ordinarily be assessed under the law that existed when the conduct took place has timeless and universal appeal. In a free, dynamic society, creativity in both commercial and artistic endeavors is fostered by a rule of law that gives people confidence about the legal consequences of their actions”.

There is no doubt that Judge Hellerstein’s ruling is “fair”, bit his reasoning is wrong. The ordre public has to be scrutinized at the moment of the annulment proceeding, because its role is to impeach that an “illegal” award enters the legal system. If at the time of the annulment proceeding, the award was contrary to public policy, there is no retroactive application of the law, even if at the moment of the arbitration the matter was not contrary to the ordre public.
 In regard to the content of the ordre public, we already mentioned that there is no clear definition of it in Mexico.[ix] 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 as in France for instance[x]).

[i] District Court for the Southern District of New York, Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. ("COMMISA") vs PEMEX-Exploración y Producción (PEP), Opinion and Order granting Petitioner’s Motion to Confirm Arbitration Award and Denying Respondent’s Motion to dismiss Petition, 10 Civ. 206 (AKH), August 27, 2013.
[ii] August 23, 2005.
[iii] May 17,2006.
[iv] June 23, 2006.
[v] February 23, 2007.
[vi] Ex. 80 at 21.
[vii] Ex. 56 at 29.
[viii] In the ruling, the decision is only mentionned by its year without any other reference.
[ix] 17 IBA Arbitration News 2 (83, 2012).


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The Principles of Lex Petrolea in Arbitration Case Law


We have already reported the infamous Commisa Case, that has now an apparent final ending.  The U.S. Court of Appeals for the Second Circuit issued a long-awaited ruling in which it concludes:
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…