Let’s talk today about enforcement in New York of arbitral awards annulled in Lagos, Nigeria. Big ones. USD $2 Billion, give or take. I know, you think you have heard and read enough about this topic. But really, where are you going to go today? Wash your hands and read on.
The scripture for today’s sermon is a judgment of the US District Court for the Southern District of New York, now in the throes of an appeal before the US Second Circuit Court of Appeals, in Esso Exploration & Production Nigeria Ltd. v. Nigerian National Petroleum Corp., 397 F. Supp.3d 323 (S.D.N.Y. Sept. 4, 2019).
ICYMI, the raw facts are these: In the early 1990s Esso, Texas folk now called ExxonMobil, corporate descendants of John D. Rockefeller’s Standard Oil (S.O., get it?) made an exploration and production deal with Nigeria’s state oil company. Being pragmatic (even if reluctant) Texas oilmen, they agreed to ICC arbitration in Lagos under Nigerian law. Esso spent a small fortune on the drilling, produced a lot of oil, but had the rug pulled out when Nigeria unilaterally changed the contractually-agreed allocations. (“My oil is my oil, your oil is my oil.”). Esso won an ICC arbitration for the aforesaid $2 billion give or take, and then was wiped out by a series of decisions in the Nigerian courts that effectively annulled the award. On the eve of time bar for U.S. enforcement, Esso brought the award (or its dessicated remnants) to the Southern District of New York, and in the above-cited decision, lost. And this was on the basis of the doctrine of “international comity,” as it has been filtered through the prevailing US jurisprudence on enforcement, or not, of New York Convention awards that have been set aside by a competent court at the seat of the arbitration.
I propose to do two, maybe three things, in this rant. First, I will trace the principle of international comity as a line running through the US annulled award enforcement case law, mainly Second Circuit case law that is stare decisis, more or less, for the pending Esso-Nigeria appeal. Second, I will hark back to the 19th Century notion of international comity in US law, and show that it has had a robust recent history elsewhere in the federal judicial system, notably in the Ninth and Eleventh Circuits, much in contrast to the constricted version that has taken root in the Second Circuit’s annulled arbitration award case law. Third and finally, I will suggest that perhaps this more robust outer-Circuit* version of what international comity means US law, foreign States that systematically nullify arbitration awards against their State instrumentalities of the State would face closer scrutiny in US courts of their alleged manipulations of their own judicial organs.
We start, again, with Chromalloy (939 F. Supp. 907 (D.D.C. 1996)), because we must. Chromalloy has fallen out of favor in part for the US District Court’s emphasis on Art. VII of the New York Convention** in its framing of the rationale for enforcing, under the New York Convention and the Federal Arbitration Act, a Convention award against Egypt that a Cairo court had tossed into the Nile. But about the role of international comity in the annulled award enforcement equation the District Court judge in Washington DC had this to say, mainly quoting a 1984 D.C. Circuit judgment in the Laker Airways case (731 F.2d 909): “‘No nation is under an unremitting obligation to enforce foreign interests which are fundamentally prejudicial to those of the domestic forum… [C]omity never obligates a national forum to ignore ‘the rights of its own citizens or of other persons who are under the protection of its laws.’” (The italics mean I like it, and as we shall see shortly even the Ninth and Eleventh Circuits evidently like this interests-based articulation of the international comity question).
The next case in the US canon, Baker Marine from the Second Circuit in 1999 (191 F.3d 194), did not develop the comity theme; the panel found it sufficient to reject the appellant’s Chromalloy-inspired reliance on Art. VII of the Convention, and to take note of the fact that this had been a Nigeria-seated arbitration under Nigerian law between Nigerian entities (non-State) on both sides – never mind that, on both sides, the contestants were corporate affiliates of large US energy industry players who evidently had organized affiliates in Nigeria in order to do business there. The Court’s conclusion that appellant “ha[d] shown no adequate reason for refusing to recognize the judgments of the Nigerian court” (here the italics are for clarity only) left quite open the question of what might constitute an “adequate reason,” to call out Nigeria for international lawlessness, especially in a case that might involve (as Baker Marine did not but Esso-Nigeria of course does) the Nigerian State as a party-affiliate.
But the D.C. Circuit was back on the track of State entity defendants in the Termorio case (487 F.3d 928). In this case, Colombia’s state electric utility acted in breach of a deal to buy power, arbitrated under the ICC arbitration clause in the power purchase contract, lost the case for $60-odd million, and then insisted in a Colombian court on a defense rejected by the arbitrators: that in Colombia after all you really CAN’T arbitrate at the ICC; you have to do it at the Bogota Chamber of Commerce. Award annulled in Bogota. Justice in American nevertheless? Negative. Recall this from the D.C. Circuit: “Because there is nothing in the record here indicating that the proceedings before the [Colombian court] were tainted or that the judgment of that court is other than authentic, the District Court was, as it held, obliged to respect it.” 487 F.23d at 930. And to take matters to even greater depths of divergence from US notions of international comity (look back at that quote from Laker Airways, a few stanzas ago), the Court, seemingly channeling a law clerk’s fascination with the writings of a certain Dutch law professor, stated: “For us to endorse what appellants seek would seriously undermine a principal precept of the New York Convention: an arbitration award does not exist to be enforced in other Contracting States if it has been lawfully ‘set aside’ by a competent authority in the State in which the award was made. This principle controls the disposition of this case.” Id. at 936.
Mercifully, the Second Circuit has not gone this far, and this notion of a New York Convention near-mandate for recognition of the non-existence of an annulled award has not gained much traction. But still Termorio helps explain why in the Second Circuit the annulled award enforcement question has become compressed into a “basic notions of morality and justice” pigeonhole: There is an express public policy exception to enforcement in the Convention (Art. V(2)(b)) said the DC Circuit, but not even a glancing reference to public policy in the section about annulled awards. And so, said the Court, even if you could say there is a public policy “gloss” on the annulled awards provision (Art. V(1)(e)) it can’t be any broader than the express public policy ground for non-recognition of an award, and therefore the settled test in that context — basic notions of what is decent and just, etc. — sets the limit of judicial discretion to decide that an foreign award annulment was unlawful and that the award still exists to be recognized and enforced in the USA. Got it? Mark this, because when we get back to Esso-Nigeria, we will see that this “basic notions” or “most basic notions” formula is, well, formulaic, and it acts as sort of a strait-jacket inhibiting what ought to be (says your Commentator) a more fulsome international comity analysis.
But first a couple of stops on the Second Circuit Expressway. Most importantly, Pemex (832 F.3d 92 (2d Cir. 2016), which looks a lot like Esso-Nigeria on the surface at least: foreign oil-producing State loses oil-related arbitration to what is effectively a US contractor, and then argues in the State’s courts that the arbitration was non-arbitrable; State Court sides with State Oil, and annuls the award. I will spare you the details of the Mexican legislative and judicial actions that formed the foundation for the Second Circuit’s adjudication. The comparison of those actions to the actions taken by the Nigerian State is the essential rhetorical framing of the Esso-Nigeria case, in the District Court’s decision and in the Second Circuit briefing so far. My job is different: first and foremost, to make you smile if not laugh, and to a lesser extent to advocate for courts to think about annulled award cases in a broader framework of international comity jurisprudence. So mainly I want to show you here (1) how the Second Circuit in Pemex seized the “most basic notions of morality and justice” strait-jacket from Termorio, and (ii) how a court somewhere might make its way from Pemex to a more fulsome comity analysis, taking guidance from Pemex and doing no disservice to it.
I start with the fact that the Pemex case really does frame the basic question as whether comity should be given to the foreign award annulment judgment: “[B]ecause the Southern District’s holding necessarily encompassed its decision to deny comity to a foreign judgment, the standard of review is modified: ‘[w]e review a district court’s decision to extend or deny comity to a foreign proceeding for abuse of discretion.’” (832 F.3d at 100). Discretion to recognize and enforce an annulled award under the Convention, said the Second Circuit panel, “is constrained by the prudential concern of international comity, which remains vital notwithstanding that it is not expressly codified in the Panama [or New York] Convention. … Although courts in this country have long recognized the principles of international comity and have advocated them in order to promote cooperation and reciprocity with foreign lands, comity remains a rule of practice, convenience, and expediency, rather than law … When construing a statute, the doctrine of international comity is best understood as a guide where the issues to be resolved are entangled in international relations.” (832 F.3d at 106) (Internal citations and quotation marks omitted!) (Italics in lieu of an applause emoji).
From this point on, the Pemex reasoning turned down a narrower path, focused on foreign judgment res judicata principles, and in our reductionist world of bottom lines and catch phrases we end up, maybe for worse not better, with an understanding that Pemex stands for a narrow “public policy exception” to a default rule of non-recognition of annulled awards, an exception confined to judgments that are “repugnant to fundamental notions of what is decent and just.” (Id. at 106-07). But we can find a foundation for a less cramped comity analysis in the text of Pemex:
“A judgment that tends clearly to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property is against public policy….” (Internal citations and quotation marks omitted). Too bad this is, alas, dictum.
Nearly one year after Pemex, the Second Circuit issued its long-awaited judgment in Thai-Lao Lignite (Thailand) Co., Ltd. v. Government of the Lao People’s Democratic Republic, 864 F.3d 172 (2d Cir. 2017) – long-awaited in part because the panel decided to wait for the Pemex panel to issue its opinion and for Pemex’s application for US Supreme Court review to run its course (certiorari was denied), and then to permit the parties to supplement the briefing in the case to take Pemex into account. Pemex was not fully determinative of the outcome, because the decision turned in part on the fact that the foreign award in Thai-Lao Lignite case had previously been recognized and enforced in a New York federal district court before the issuance of the annulment judgment by the competent court at the arbitral seat in Malaysia. My takeaway from Thai-Lao Lignite, for purposes of this Commentary, is that the panel recognized the separate strands of Pemex that I have identified above – international comity and public policy – and at least initially considered that they might have separate but complementary roles in an annulled awards enforcement setting. That is my take on the following language from the opinion: “[W]e ruled [in Pemex] that although Article V(1)(e)’s permissive language could be read to suggest that a district court has unfettered discretion as to whether to enforce [an annulled] award, the court’s exercise of that discretion should rather be treated as constrained by the prudential concern of international comity. … Pemex also carved out a public policy exception to the comity principle for occasions when enforcing an arbitral award annulled in the primary jurisdiction is needed to vindicate fundamental notions of what is decent and just in the United States.” 864 F.3d at 176 (boldface supplied for emphasis). From this one might conclude that the Second Circuit here read Pemex as endorsing a fulsome international comity analysis in annulled award enforcement cases, with the public policy “exception” as the exceptional circumstance where deference to the foreign annulment judgment almost inevitably must be rejected. But in the dispositive section of the judgment, the Thai-Lao Lignite Court took a more restrictive view, effectively treating the Pemex version of the public policy exception as exhaustive of the scope of US judicial discretion to enforce an annulled award: “In Pemex, we adopted [our] view of the scope of our courts’ discretion under Article V(1)(e) : that refusal to recognize a foreign judgment nullifying an award is appropriate only to vindicate fundamental notions of what is decent and just in the United States.” Id. at 184 (Internal citations and quotation marks omitted).
So now you know why the issue framed for decision by the Appellant Esso in Esso-Nigeria is whether the Nigerian judicial annulment of Esso’s $2 Billion award offends “fundamental notions of what is decent and just in the United States.” But perhaps you wonder, as I do, why the Second Circuit and the DC Circuit have so consciously turned their backs on the possibility of a fulsome application of the US doctrine of international comity – indeed have not in the annulled award cases even recognized that there is such a more fulsome comity test available (as described in one contemporary version below). Instead the annulled award cases from New York and Washington pay lip service to comity doctrine and segué to a restrictive, deferential test of essential public policy. The reason for this appears to be the perception that the New York Convention assigns special status to the competent court at the seat of the arbitration, recognizing that court’s power to nullify the outcome of the arbitration on any basis short of transparently arbitrary confiscation from the winner. But isn’t it more reasonable to assume – there being no decisive travaux préparatoires on this point cited in the case law or known to this Commentator – that the drafters (huddled in First Avenue taverns during the 1958 Yankees-Braves World Series) had in mind that Contracting States would have arbitration laws that more or less congregate around an international norm, with the occasional benign local quirk like requiring wing arbitrators to be accomplished mogul skiers or permitting vacatur for “manifest disregard of the law”? Isn’t that the strand of arbitration theory that inspired the evolution of the UNCITRAL Model Law (in the same First Avenue taverns)? And isn’t such a normative limitation on the power of a Convention Contracting State to slaughter its own awards to be fairly implied from that State’s acceptance of an international legal obligation to recognize and enforce foreign awards?
OK you say, show me this so-called fulsome international comity test. I will, and don’t lose patience just because it comes from California. Your pomegranates come from California.
If you were a Second Circuit judge just poking around for the intellectual fun of it, and feeling un-cabined by the precedents of Baker Marine and Pemex and Thai-Lao Lignite, at least in the privacy of your own chambers and thoughts, you would discover that US comity jurisprudence comes in a variety of shapes and sizes, depending on the purpose for which a comity argument is raised. And to narrow the field a bit, you would discover a sub-category of comity doctrine that is referred to, thematically, as “Adjudicatory Comity.” (E.g., Mujica v. AirScan, Inc., 771 F.3d 580 (9th Cir. 2014)). That label seems to apply to a number of adjudicatory situations, ranging from one where there is already a final judgment on the same or nearly the same claim from a foreign court, to a parallel proceedings scenario, to something akin to a forum non conveniens motion on a claim not brought but that could be brought in some form in a foreign court. In the Mujica case just cited, the underlying claims were those of victims of a bombing attack by the Colombian military against rebel insurgents in Colombia in 1998. And while claims arising from those events were pending in Colombia’s courts, the claims in the US courts were under our Alien Tort Statute against US corporations allegedly complicit in the bombing, and those precise claims could not be litigated in Colombia. In all events this was referred to as a “prospective” Adjudicatory Comity situation – looking to whether a foreign court would be treated as the exclusive forum for a merits adjudication to be obtained.
let’s first have a look at the comity principles identified in that setting.
And then let’s consider to what extent it might be appropriate to invoke those
principles in what is clearly a “retrospective” context – the potential
recognition and enforcement in the US of an already-annulled foreign arbitration
award, most especially one annulled by the State court of a losing State party.
The Ninth Circuit in Mujica adopted in broad outlines a three-part standard (at least) that had been stated by the Eleventh Circuit, inviting courts to “evaluate several factors, including  the strength of the United States’ interest in using a foreign (or domestic) forum,  the strength of the foreign governments’ interests, and  the adequacy of the alternative forum.” (quoting from Ungaro-Benages v. Dresdner Bank AG, 379 F.3d 1227, 1238 (11th Cir. 2004)). Expanding on the US interests factor, the Ninth Circuit elaborated five factors: “(1) the location of the conduct in question, (2) the nationality of the parties, (3) the character of the conduct in question, (4) the foreign policy interests of the United States, and (5) any public policy interests.” (771 F.3d at 604). After a more detailed exposition of the considerations in applying each of these five factors, the Ninth Circuit observed that “[t]he proper analysis of foreign interests essentially mirrors the consideration of U.S. interests.” (Id. at 607). And in the third branch of the exposition of its Adjudicatory Comity analysis, the Court looked at how to assess the adequacy or inadequacy of the foreign forum. Here the Court stated: “[C]ourts consider decisions rendered by the alternative forum and ask ‘(1) whether the judgment was rendered via fraud; (2) whether the judgment was rendered by a competent court utilizing proceedings consistent with civilized jurisprudence; and (3) whether the foreign judgment is prejudicial [and] … repugnant to fundamental principles of what is decent and just.’” (Id. at 608, quoting from Belize Telecom, Ltd. v. Gov’t of Belize, 528 F.3d 1298, 1307 (11th Cir. 2008)).
“Aha” you say – “finally something that looks familiar.” And indeed it is notable, and important to this discussion, that — courtesy of the Termorio and Pemex and Thai-Lao Lignite — the entire analysis in the Second Circuit of whether to grant or refuse enforcement of an annulled foreign award has been telescoped into what the Ninth and Eleventh Circuits treat as merely one factor in the third branch (“adequacy of the foreign forum”) of a fulsome examination of Adjudicatory Comity. But consider the shortcomings of this telescoping in a case like Esso-Nigeria. Arguably it results in little or no examination of the state of diplomatic relations between the United States and Nigeria. Arguably it results in marginal consideration of available evidence concerning judicial independence in Nigeria broadly speaking, as opposed to what can be brought to bear in the record concerning the specific judicial proceedings in which the annulment occurred. Arguably the narrow focus on what is “fundamentally decent and just” results in no examination beyond the case-specific evidence of Nigeria’s faithfulness or faithlessness as a Contracting State of the New York Convention, or Nigeria’s conduct in regard other bilateral or multilateral treaties to which the US and Nigeria are parties (and note here that two key features of the older notion of comity drawn from 19th Century and earlier jurisprudence: reciprocity between nations, and the essentially permissive and prudential character of comity. See Hilton v. Guyot, 159 U.S. 113 (1895)). Arguably the Second Circuit’s narrow “fundamental notions” approach also results in insufficient attention to the duration and size of the financial commitment made by the US party to the arbitration, not to mention the actual circumstances of the US party’s acceptance of Nigeria as the arbitral seat and its acceptance of Nigerian law as the governing law. Arguably it results in insufficient attention to the position of the US party in the US and global economy and the economic and security interests of the US and our allies and strategic partners that might be implicated.
As you read the District Court judgment in Esso-Nigeria and the Appellant’s Brief in the Second Circuit, take note of the extensive record that was made in the District Court concerning many of the factors identified in the preceding paragraph – but especially judicial independence in Nigeria — and observe how little bearing that evidence had on the District Court’s analysis. That analysis not only focused on the Pemex “public policy exception” formula, but effectively proceeded to narrow that test even further by comparing one-by-one the egregiousness or not of Nigeria’s actions toward Esso to the steps taken by Mexico/Pemex against the US affiliated Pemex contractor. Appellant in Esso-Nigeria essentially accepts the existing framework of Second Circuit law, and seeks reversal within it. But there are clear overtones in its brief appealing to a broader perspective on comity of the type described as Adjudicatory Comity in the Ninth Circuit. We should expect to see the Esso-Nigeria case, in its appellate outcome, as provoking more discussion about a shift in that direction in the US jurisprudence concerning recognition of annulled foreign awards.
*Manhattanites thinks of Brooklyn, Queens and the Bronx as “Outer Boroughs.” Manhattan international arbitration lawyers can be charged with thinking of places like the Ninth and Eleventh Circuits as “Outer Circuits,” mainly because they are less often called upon, as compared to the Second and DC Circuits, to adjudicate important issues of US international arbitration law.
* In pertinent part Art. VII says that the Convention does not “deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or treaties of the country where such award is sought to be relied upon.” The position of the Court in Chromalloy was this meant that if an award would not be subject to vacatur under FAA Section 10, the domestic FAA, then it should be enforced despite the foreign seat court annulment. That view has not gained traction in case law and has been criticized in literature.