International Arbitration: Important 2014 Cases In Review

By Carlos Ramos-Mrosovsky

2014 was an active year for international arbitration generally and for international investment treaty arbitration in particular.  In this post, Carlos Ramos-Mrosovsky, a senior associate with Freshfields’ International Arbitration Group in New York,[1] considers three cases that were particularly notable over the past year. 

BG Group, PLC  v. Republic of Argentina
In BG v. Argentina, the United States Supreme Court issued its first-ever decision in connection with investment treaty arbitration, reversing a D.C. Circuit decision to vacate an US$185 million UNCITRAL award in favor of a British investor in the Argentine gas sector.[2]
The D.C. Circuit had vacated the arbitral award on the theory that the tribunal had exceeded its powers by hearing the dispute despite the claimant’s non-compliance with a provision of the governing UK-Argentina Bilateral Investment Treaty (BIT) facially requiring them to pursue their claims before the Argentine courts for 18 months before commencing arbitration.[3] For its part, the arbitral tribunal had found this treaty requirement to be excused because Argentine domestic legislation would have made efforts to pursue BG’s claim in local courts “absurd and unreasonable.”
Granting certiorari despite the opposition of the U.S. Solicitor General, the Supreme Court reversed the D.C. Circuit by a vote of 7–2, and reinstated the arbitral tribunal’s award. As Justice Breyer’s majority opinion explained, compliance with the treaty’s local litigation requirement was a procedural issue, as to which an arbitral tribunal’s opinion was as entitled to deference from a reviewing court in a treaty-based arbitration, as in a contractual one.[4] The majority rejected the Circuit’s view that the local litigation requirement was a threshold issue of “arbitrability” presumptively subject to de novo review by the  court.

Crucially, the Supreme Court’s decision in BG turned not on the Court’s view of the arbitral tribunal’s specific interpretation of the treaty requirement, but on its view of the proper relationship between courts and arbitral tribunals.[5] By declining to subject arbitral tribunals to additional second-guessing where a treaty is involved, the decision in BG not only reaffirms the status of the United States as a jurisdiction friendly to international arbitration, but, importantly, also reinforces the legitimacy of investor-state arbitration by sending an important message that the U.S. judiciary respects the international investment treaty arbitration regime.

Corporación Mexicana de Mantenimiento Integra, S. de R.L. de C.V. (COMMISA) v. PEMEX-Exploración y Producción

Another important arbitration-related case that attracted immense attention over the past year is COMMISA v. PEMEX, decided by a U.S. district court in late 2013, and currently pending on appeal before the Second Circuit.  In Pemex, for the first time in nearly two decades, a U.S. district court agreed to enforce a foreign arbitral award that had been annulled at the seat of arbitration.[6]  The district court’s decision was appealed to the 2d Circuit, which heard oral arguments in November of 2014.  A decision is anticipated in early 2015.

In Pemex, the district court read the word “may” in Article V(1)(e) of the Panama Convention, which provides that recognition and enforcement of an award “may be refused” where an award “has been annulled or suspended by a competent authority of the State in which, or according to the law of which, the decision has been made,” to allow it to confirm an award that had been annulled by a Mexican court.  The district court in Pemex acknowledged prior cases finding that U.S. courts “normally may not enforce an arbitration award that has been lawfully set aside by a ‘competent authority’” at its seat.[7]  But the Pemex district court also referenced language in earlier court decisions that at least theoretically preserved a court’s ability to enforce an award, despite its annulment at the seat, in at least those extraordinary cases where “fundamental notions of fairness” justified doing so.[8]  The Pemex district court concluded that this high standard had been met, because it found that the Mexican courts had annulled the arbitral award on the basis of a retroactive application of new law, contrary to the claimant’s reasonable expectations, in favor of a state respondent, leaving the claimant with no other available remedy.  Though never stated directly in the district court’s decision, it has been suggested that the district court may have been influenced by the perception that the Mexican courts’ setting-aside of the award had been results-oriented, and that the claimant had received less than a fair shake from the Mexican judiciary. 

Pemex’s result is not limited to the Panama Convention, however, as the language of that treaty is functionally equivalent to that of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), the primary treaty providing for the international recognition and enforcement of arbitral awards.[9] If the district court’s decision is affirmed by the Second Circuit, Pemex would arguably signal an important evolution in the attitude of the U.S. judiciary towards international arbitration awards, signaling willingness, albeit in exceptional circumstances, to override an annulment decision from the primary jurisdiction, i.e. the courts of the arbitral seat.  At the same time, the Pemex decision serves as a useful reminder of the occasional power of arguments about procedural fairness even in a context where judicial intervention is normally tightly circumscribed.

Hulley Enterprises Limited (Cyprus); Yukos Universal Limited (Isle of Man); and Veteran Petroleum Limited (Cyprus) v. The Russian Federation[10]

The potential scale and significance of international investment treaty arbitration awards were dramatically demonstrated by the largest-ever international arbitration award, in a case underscoring the high stakes and geopolitical dimension of international investment arbitration. Three parallel claims brought by foreign shareholders of Yukos, once Russia’s largest oil and gas company, under the Energy Charter Treaty, were heard by a single panel convened under the auspices of the Permanent Court of Arbitration in The Hague.  The claimant shareholders argued that Yukos’s break-up by the Russian government between 2003 and 2006 had actually been the result of a complex scheme to expropriate the company’s assets and place them under state control to punish political opponents.  Russia, on the other hand, insisted that Yukos had been properly broken up in response to its evasion of taxes and status as a “criminal enterprise” run by wealthy oligarchs.[11]  The Tribunal found for the claimants and ordered Russia to pay the Yukos shareholders US$50 billion in compensation, along with a furtherUS$60 million in legal fees.[12]  Although this is the largest international arbitral award reported to date, the Yukos claimants had actually demanded “no less than” US$114 billion.[13]

The Yukos award is notable not only for its size, but also for the nature of its quantum analysis. In particular, the Yukos tribunal relied upon a “comparable companies” methodology to gauge Yukos’s value in light of the market capitalization of similar companies. The tribunal adjusted the value obtained to the date of award by indexing to certain oil and gas stocks traded in Moscow. At the same time, the tribunal embraced the concept of contributory fault, reducing the damages awarded by 25% to reflect its conclusion that at least some of Yukos’s tax arrangements had in fact been abusive and unlawful.[14] The Tribunal nevertheless refused to treat Yukos’s “unclean hands” as a jurisdictional bar, rejecting the argument that such a doctrine should be considered a general principle of international law.[15]

There is no guarantee that so massive an award will ultimately be paid. The Russian government has denounced the award—issued at a time of heightened tension between Russia and NATO over Ukraine—as politically motivated and has vowed to resist its enforcement in proceedings that will doubtless prove protracted and complex.[16]  Nevertheless, the Yukos award highlights the stakes involved in some investment treaty cases and may make other arbitral tribunals’ more comfortable with awarding larger amounts in compensation in appropriate cases.

These cases, important in themselves, simultaneously illustrate broader debates within the international arbitration community.  In BG, the U.S. Supreme Court may be seen to have endorsed investor-state arbitration, despite its many critics, as a dispute resolution regime entitled to the same deference and support as ordinary international commercial arbitration. Meanwhile in Pemex, U.S. courts may be inching, albeit very cautiously, toward an understanding of arbitral awards as part of an “international” legal order that is less deferential to the courts of the seat of arbitration. Finally, Yukos serves as a reminder of how much may be at stake in investor-state disputes, not simply financially, but also from a political perspective, while the huge sums awarded cannot fail to attract the continued interest of the world’s lawyers, investors, scholars – and perhaps litigation funders – to the field. 

The views expressed above are the author’s alone and are not necessarily the views of Freshfields Bruckhaus Deringer LLP, Freshfields Bruckhaus Deringer US LLP, or of any of the firm’s clients.




[1] The author can be contacted at Carlos.Ramos-Mrosovsky@freshfields.com.  
[2] BG Group, PLC v. Republic of Argentina, 572 U.S. __ (2014), 134 S.Ct. 1198.
[3] 664 F.3d 1363 (2012).
[4] BG, 134 S.Ct. at 1208 (“As a general matter, a treaty is a contract, though between nations. Its interpretation normally is, like a contract’s interpretation, a matter of determining the parties’ intent. And where, as here, a federal court is asked to interpret that intent pursuant to a motion to vacate or confirm an award made in the United States under the Federal Arbitration Act, it should normally apply the presumptions supplied by American law.”).
[5] BG, 134 S.Ct. at 1209 (“in the absence of explicit language in a treaty demonstrating that the parties intended a different delegation of authority,” the “ordinary interpretive framework” governing arbitrations arising under a contractual arbitration clause applies).
[6] Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (COMMISA) v. PEMEX-Exploración y Producción, 962 F.Supp.2d 642 (S.D.N.Y. 2013).  See also Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F.Supp. 907 (D.D.C 1996).   
[7] TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 935 (D.C. Cir. 2007).
[8] COMMISA, 962 F.Supp.2d at 656-657 (“a district court should hesitate to defer to a judgment of nullification that conflicts with fundamental notions of fairness”).
[9] Inter-American Convention on International Commercial Arbitration, Jan. 30, 1975, 104 Stat. 448, 14 I.L.M. 336 (1975) (Panama Convention); New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517; 7 I.L.M. 1046 (1958). See also 9 U.S.C. §§ 301-307 and Productos Mercantiles e Industriales, S.A., v. Faberge USA, Inc., 23 F.3d 41, 45 (2d. Cir. 1994) (Panama and New York Conventions should yield same results).
[10] Hulley Enterprises Limited (Cyprus); Yukos Universal Limited (Isle of Man); and Veteran Petroleum Limited (Cyprus) [Yukos] v. The Russian Federation, PCA Cases Nos. AA 226, 227, 228.  
[11] Yukos, at ¶ 73.
[12] Yukos, at ¶ 1888.
[13] Yukos, at ¶ 4.
[14] Yukos, at ¶ 1637.
[15] Yukos, at ¶ 1363.
[16] See, e.g., Stanley Reed, “$50 Billion Awarded in Breakup of Yukos,” New York Times (July 28, 2014) (noting the Russian government’s characterization of the Yukos award as “politically biased”).