Marc J. Goldstein Arbitrator & Mediator NYC
January 27, 2023

Ay, Chihuahua!!

Just when you thought the US law concerning judicial enforcement of annulled foreign arbitral awards was becoming relatively settled and predictable, if not very satisfactory, along comes the US Tenth Circuit Court of Appeals with a fresh and helpful perspective. That Court has held that a US district court did not abuse its discretion when it refused to vacate its initial judgment giving recognition and enforcement to such an award, and declined to give effect to a judicial annulment judgment thereafter sought and obtained from a court at the seat of arbitration in Bolivia. (Compañia de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua, 2023 WL 140552 (10th Cir. Jan. 10, 2023)). (hereinafter, for the dog-lovers among you, “Chihuahua,”).

“Why unsatisfactory?” you might ask. To simplify greatly, it is because the US law about enforcing (or not) annulled awards has become conveniently but uncomfortably linked to the US law applying the New York Convention’s public policy exception to award enforcement in Article (V)(2)(b). We all learned early in our arbitration careers that such refusal of enforcement is available only if enforcement of the foreign award “would violate our most basic notions of morality and justice.” We committed that phrase to memory, if not also the US Second Circuit case that coined the phrase: Parsons & Whittemore Overseas Co. v. Société Générale, 508 F.2d 969 (2d Cir. 1974). When US courts have been asked whether they will enforce a foreign arbitral award even though it has been judicially set aside at the arbitral seat, more often than not the same formulation of the public policy exception had been applied to the question of giving effect to the foreign court’s annulment judgment. See, e.g., Getma Int’l v. Republic of Guinea, 191 F.Supp.3d 43, 49-51 (D.D.C. 2016), aff’d, 862 F.3d 45 (D.C. Cir. 2017) (“The Court is unconvinced that the annulment judgment … violated the most basic notions of justice”). Because after all the two questions: recognition of the annulled award, and recognition of the judgment that annulled the award, would appear to be the same question.

Right? Well, not necessarily, says the Tenth Circuit in Chihuahua. It is not the same question, says the Tenth Circuit, when the annulment judgment is issued after a US district court has already entered a judgment recognizing the award under the New York Convention and FAA Chapter Two, and procedurally the application before the Court is not to recognize the foreign award in the first instance, but to vacate the already-entered recognition judgment.

When we have a prior judgment recognizing the award (usually but not necessarily before its annulment), we have what old-fashioned US litigation types call a “60(b)(5) Issue.” This refers to the number and sub-section of the Federal Rule of Civil Procedure concerning vacatur of a previously-entered final judgment of a United States District Court.

On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons … (5) the judgment has been satisfied, released, or discharged; it is based upon an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable

The 60(b)(5) Issue potentially adds (and in Chihuahua actually did add) different and important elements to the annulled awards recognition equation. The Federal Rules of Civil Procedure are expressly tied to the New York Convention by Article III of the latter (“Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon”). Nice. You might therefore say (and the Tenth Circuit in Chihuahua indeed said at least implicitly) that the policies underlying Rule 60(b)(5) – policies generally oriented toward the finality of judgments — have some respectable status under the Convention when the judgment sought to be vacated under Rule 60(b)(5) is a judgment granting recognition to an award falling under the Convention.

When the jurisprudence of Rule 60(b)(5) comes into play, on a motion to vacate a judgment that recognized a foreign award, this has at least three important consequences: (1) Rule 60(b)(5) case law places a high burden on the moving party seeking “relief from” (i.e. vacatur of) a judgment (the loser in the arbitration, in Chihuahua a Mexican cement company), a posture quite different from an effort by the award winner to get initial recognition of an annulled award, when the applicant has the high burden to show the recognition trumps comity because basic US notions of morality and justice would otherwise be offended. (2) a Rule 60(b)(5) motion made to a federal district judge, perhaps more accustomed to getting such motions from disgruntled and occasionally devious domestic litigants, brings into focus the systemic (and societal) interest in the finality of judgments, and puts the conduct of the movant on trial for assessment of possibly inequitable tactics. (3) The federal appellate court reviews a district court’s Rule 60(b)(5) decision only for abuse of discretion, and this commodious standard affords a district court judge quite a bit of latitude to give effect to her subjective views of what may have happened, or what generally tends to happen, or what is reputed to tend to happen, in the courts of a place like …. ummm … Bolivia.

And this brings me to a very subjective point, but an important one. Surely it has occurred to many of you that the foreign countries whose award annulment judgments have spawned our Chromalloy case law (that’s the fountainhead US case, young people, remembered fondly by those of us nearing or even beyond Geezer status) are generally not medal of honor winners, for judicial independence and integrity, in the view of organizations like Human Rights Watch. Egypt, Nigeria, Mexico, Colombia, Malaysia, Guinea and (in the Chihuahua case) Bolivia. And yet the principle of “international comity” as developed in the case law generally gives succor to the outcomes in the courts of such nations unless our “basic notions of morality and justice” are offended, and generally such an offense will not be found unless there is direct and persuasive evidence that the party seeking recognition of an annulled award was denied basic due process in the annulment case. That evidence is almost never available.

And yet we naturally cringe, and a rational district court judge might cringe, just thinking about and reading just a little bit about the state of the judiciary in Bolivia. For example:

“Theoretically, the judiciary is an autonomous and independent institution with far-reaching powers. In reality, the judicial system remains highly politicized; its members often represent partisan viewpoints and agendas. Court membership still reflects political patronage. As a result, the administration of justice is held hostage to the whims of party politics.” (US Government Publishing Office (GPO) country study prepared for the Library of Congress in 1989).

“[Former Bolivian President Evo] Morales had called judicial independence a ‘doctrine’ of the United States and of ‘capitalism’. In fact, during almost 14 years in office, Morales’ administration actively weakened judicial independence. For example, the 2009 Bolivian Constitution established that high court judges and members of the Magistrates Council, the body that appoints and dismisses judges, would be elected by voters from lists created by Congress. MAS, however, controlled two thirds of the seats in both houses, and ultimately packed the lists with people linked to the government.” (Article published 11/25/20 by leaders of the Americas division of Human Rights Watch).

The procedural facts about the Bolivia annulment judgment that mattered to the district court in Chihuahua were, stated simply for present purposes, that annulment had been sought without success in Bolivian courts before the US recognition judgment was obtained, but after that US recognition judgment was obtained the award-losing Mexican company renewed its efforts in the Bolivian courts, ultimately taking the matter to Bolivia’s highest constitutional court for a second time, where it finally prevailed in obtaining annulment. As summarized by the Tenth Circuit: “GCC thus continued raising the same challenges in Bolivia until it received the answer it wanted.”

Thus, the district court did not abuse its discretion in finding that the movant’s conduct in making dogged and repetitive pursuit of an annulment judgment after the initial entry of the US recognition judgment was so offensive to US policy principles enshrined in our protective approach to the finality of judgments, as expressed in Rule 60(b)(5), that refusal to give effect to the Bolivian annulment judgment was a defensible exercise of discretion, even without direct consideration of the fairness or regularity of the Bolivian annulment proceedings.

A brief excerpt from the Tenth Circuit’s opinion captures this point:

GCC [the award-losing, eventual annulment-winning, Mexican company] asserts that the district court applied the wrong legal test when it denied vacatur. It contends the district court “alter[ed] … the [relevant] test in a manner never adopted by any other court” by concluding that “even though the Bolivian annulment orders were not repugnant to public policy, vacatur of its own judgment supposedly would be.” … The only relevant inquiry, GCC says, is whether the “order itself is repugnant to fundamental notions of what is decent and just.”… We disagree. GCC advances a flawed analysis and a selective reading of the case law. A district court may decline to enforce a primary jurisdiction’s annulment order if the order itself is repugnant or if enforcing that order would offend public policy. The Second Circuit articulated this approach, the Convention supports it, and we adopt it here.

The Court then proceeded to analyze one of the leading Second Circuit case, the Pemex (a/k/a/ COMMISA) case, in essence to point out that the rationale of the case was that US public policy was not violated because the Mexican annulment judgment violated US public policy, but because “giving effect to” the Mexican annulment judgment would violate US public policy.

In the interests of brevity, I refrain from a detailed revisitation of Pemex. And I also refrain from a detailed recitation of the different points of view on Pemex and its Second Circuit progeny expressed by the Chihuahua panel majority and the dissenting judge, respectively. But the fundamental points are these: (1) the panel majority, but not the dissent, read the Second Circuit case law to allow a district court to consider offenses to US public policy that would result from “giving effect to” a foreign award annulment judgment, even if the annulment judgment itself does not violate US public policy, and (2) the panel majority, but not the dissent, allows that in the context of a Rule 60(b)(5) motion to vacate a prior US award recognition judgment based on a later-obtained foreign annulment judgment, US public policy as reflected in Rule 60(b)(5) brings within the discretion of the district court public policy considerations that go beyond “basic notions of morality and justice” to include, in the award recognition judgment context: “[t]hree strong United States interests … (1) protecting the finality of judgments, (2) upholding parties’ contractual expectations, and (3) the policy in favor of arbitral dispute resolution.”

So, you ask, why is this Tenth Circuit case significant, given that most annulled award enforcement contests are fought in New York (Second Circuit) or Washington (D.C. Circuit)? The answer is that the Tenth Circuit panel majority analysis purports to be synchronous with the law of those Circuits, and especially the Second Circuit. And advocates for recognition of annulled awards in the district court of those Circuits will refer to Chihuahua as a persuasive if not controlling take on the state of Second Circuit law. (I will leave out the DC Circuit for this post, to keep things relatively short and readable. Readers there will reach their own conclusions on whether Chihuahua is consistent with the Termo Rio and Getma cases, and will note that neither case arose in a Rule 60(b)(5) context.)

In the Second Circuit we have most recently the Exxon-Nigeria case (Esso Exploration & Prod. Nigeria Ltd. v. Nigerian Nat’l Petroleum Corp., 40 F.4th 56 (2022)). There the Court affirmed a district court decision to deny recognition to an award annulled by the “primary jurisdiction” court in Nigeria. But unlike Chihuahua and unlike the Second Circuit’s Thai-Lao case from 2017 (Thai-Lao Lignite (Thailand) Co. v. Gov’t of Lao People’s Republic, 864 F.3d 172 (2d Cir. 2017)) the primary jurisdiction annulment preceded the US recognition proceedings. This procedural posture distinction will be important to how Exxon-Nigeria will figure in the analysis a New York-seated US district court would make if asked to vacate its own judgment recognizing a foreign arbitral award in deference to a subsequent foreign judgment annulling that award.

Two formulations of governing legal principles within Exxon-Nigeria have potentially different implications if the case before a district court entails a motion to vacate a prior judgment confirming an award. First, the Court in Exxon-Nigeria states that “the critical question [is] whether a foreign judgment setting aside an Arbitral award offends ‘fundamental notions of what is decent and just in the United States” [quoting from Pemex, and channeling and paraphrasing Parsons & Whittemore as did the Pemex court]. But second, elsewhere in Exxon-Nigeria, the Court treats Pemex in terms that are (i) less directly linked to the Parsons & Whittemore catch-phrase, and (ii) more directly linked to the question of when it is improper to give effect to foreign judgment that annulled the award. As to the latter, the Exxon-Nigeria decision quotes Pemex: “‘[A] final judgment obtained through sound procedures in a foreign country is generally conclusive unless enforcement of the judgment would offend the public policy of the state in which enforcement is sought.’”

One can therefore read both Pemex and Exxon-Nigeria as supporting the discretion of a US district court to give a more capacious treatment of US public policy when focusing its attention on whether there would be an offense to US public policy from giving effect to the foreign annulment judgment. That is precisely the reading of the Second Circuit case law embraced by the panel majority in Chihuahua. Further, we can take comfort that we are on the right track in discerning an acceptance of this capacious view, because the Second Circuit’s decision in Exxon-Nigeria builds upon, and is authored by the same judge who wrote for the panel in the Thai-Lao case from 2017. Thai-Lao remains the only Second Circuit case that, like Chihuahua, treated the interplay between award enforcement under the Convention and vacatur of a US award recognition enforcement judgment under Rule 60(b)(5). In Thai-Lao the Second Circuit struck a malleable balance among competing policy considerations, in these terms:

In conducting a Rule 60(b)(5) analysis, district courts should analyze the full range of Rule 60(b) considerations, including timeliness and the equities. In conducting this analysis, courts – in accordance with Pemex – ought to assign significant weight to considerations of international comity in the absence of a need to vindicate “fundamental notions of what is decent and just in the United States.”

That position is essentially what the Tenth Circuit has now adopted. But whereas the Tenth Circuit found no abuse of discretion in the district court’s refusal to vacate its prior award recognition judgment, the Tenth Circuit decision stands to remembered and cited for the power of a US district court — while giving “significant weight” to considerations of comity — to give significant weight also to the US public policy values underlying the restrictive approach to vacatur of a prior judgment under Rule 60(b)(5) — notably the policy favoriting finality of judgments generally, the fulfillment of contractual expectations, the favorable regard for arbitral dispute resolution, and the unfavorable regard for inequitable conduct by applicants for equitable relief.

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