US Court Refuses To Enforce Award Set Aside At The Seat Of Arbitration

In Esso Exploration and Production Nigeria Limited & Ors v Nigerian National Petroleum Corporation (4 September 2019), the US District Court considered a dispute stemming from a 1993 Production Sharing Contract between Esso and NNPC relating to the Erha oil field off the coast of Nigeria, refusing to enforce an award made in Nigeria and set aside by the Nigerian court.

The agreement anticipated that Exxon and Shell affiliates would invest billions of dollars to extract oil and share profits with NNPC. But the affiliates, Esso Exploration and Production Nigeria Ltd and Shell Nigeria Exploration and Production Co Ltd, accused NNPC of unilaterally “lifting” more oil than was contractually allowed, at the behest of Nigeria’s government, depriving them of billions of dollars of oil. Esso commenced arbitration against NNPC in 2009 and in 2011 the tribunal awarded Esso $1.799 billion. The Nigeria Federal High Court subsequently vacated the Award on the basis, inter alia, that the dispute was not contractual in nature, but rather a tax dispute subject to the exclusive jurisdiction of the Nigerian Tax Appeal Tribunal, and hence not arbitrable. The Nigerian Court of Appeal found that the High Court properly set aside the Award because the matter was primarily a tax dispute.

Esso’s Arguments

Esso sought to enforce the award in the USA. NNPC resisted enforcement on three grounds: (i) the Court lacked personal jurisdiction over it; (ii) that even if the Court could exercise personal jurisdiction, the action should be dismissed on forum non conveniens grounds, and (iii) that the court could not confirm the award because it was set aside by the Nigeria courts.

Jurisdiction and Forum Non Conveniens

In relation to (i), the court stated that for it to exercise personal jurisdiction (1) there must be procedurally proper service of process, (2) there must be a statutory basis for personal jurisdiction, and (3) the exercise of personal jurisdiction must comport with constitutional due process. The court considered various alter ego considerations finding that NNPC was an alter ego of Nigeria; accordingly, no due process analysis was required, and the Court could exercise personal jurisdiction over NNPC (further, that even if due process was required, this element was satisfied).

In relation to (ii), the Court was not persuaded that it warranted dismissal on discretionary forum non conveniens grounds at this advanced stage of the litigation.

Set Aside At The Seat of Arbitration

In relation to (iii), Esso argues that this Court should confirm the Award—even though it has been set aside in Nigeria—because (1) the liability portion of the Award was reinstated, this Court should confirm that portion of the Award and use its inherent power to award damages; (2) this case is analogous to Pemex, where the Second Circuit confirmed an arbitral award that had been set aside; and (3) Esso has not received due process in Nigeria.

The Court commenced its analysis with the following general comments:

“In general, “when a party brings an action to confirm an arbitration award falling under the [New York] Convention, a court ‘shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.’” Baker Marine (Nigeria) Ltd. v. Chevron (Nigeria) Ltd., 191 F.3d 194, 196 (2d Cir. 1999) (quoting 9 U.S.C. § 207). The party opposing enforcement has the heavy burden of proving the existence of one of these grounds. See NTT DoCoMo, Inc. v. Ultra d.o.o, 2010 WL 4159459, at *2 (S.D.N.Y. Oct. 12, 2010). The relevant ground here falls under New York Convention Article V, paragraph (1)(e), which provides that a court may refuse to confirm an award when it “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.” Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15, 20 (2d Cir. 1997) (quoting Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. V, ¶ (1)(e), June 10, 1988, 21 U.S.T. 2517, 330 U.N.T.S. 38 (hereinafter “New York Convention”)). The parties do not dispute that the Award has been set aside in Nigeria.”

“Notably, this ground is permissive, not mandatory. See Pemex, 832 F.3d at 106. Accordingly, the decision to confirm is committed to this Court’s sound discretion. Thai-Lao Lignite (Thai.) Co. v. Government of Lao People’s Democratic Republic, 864 F.3d 172, 181 (2d Cir. 2017). Moreover, there is a “strong public policy in favor of international arbitration,” and the “review of arbitral awards . . . is very limited.” Encyclopaedia Universalis, 403 F.3d at 90 (quotation marks omitted). Indeed, confirmation “is a summary proceeding in nature, which is not intended to involve complex factual determinations, other than a determination of the limited statutory conditions for confirmation or grounds for refusal to confirm. A district court confirming an arbitration award does little more than give the award the force of a court order.” Zeiler v. Deitsch, 500 F.3d 157, 169 (2d Cir. 2007) (citation omitted).”

In relation to Esso’s first argument, the court considered that the authorities cited by Esso (Zurich American Insurance Co. v. Team Tankers A.S., 811 F.3d 584, 588 (2d Cir. 2016); Seed Holdings, Inc. v. Jiffy International AS, 5 F. Supp. 3d 565, 591 (S.D.N.Y. 2014); Pemex, 832 F.3d), did not support the proposition that a district court can fashion a $1.8 billion award using only its inherent authority. The Court stated that:

“while this Court may have inherent authority to fashion appropriate relief in certain circumstances, exercising that authority to create a $1.8 billion judgment is a bridge too far.”

In relation to Esso’s second argument – relying on Pemex (where the court ruled that a foreign arbitral award should be confirmed even though it was set aside by the foreign arbitration tribunal), the Court stated the public policy exception is narrow and available only in rare circumstances, and the standard is high and infrequently met; accordingly, citing Pemex, “[a]ny court 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.” (Pemex, 832 F.2d at 111). The Court examined a number of factors (as it did in Pemex):

  • The Vindication of Contractual Undertakings. The Court considered that the agreement required any arbitral proceeding to occur in Nigeria and to apply Nigerian law, and because it was at least arguable that this was a non-arbitrable tax dispute under Nigerian law, it could not be said that the parties agreed to arbitrate this dispute. That was different to Pemex, where the respondents participated in the arbitration “without contending that its act of administrative rescission was beyond the reach of arbitration” or without any dispute as to whether the arbitration clause applied to the underlying dispute. The Court held that, ultimately, while it was arguably unclear whether this matter was a non-arbitrable tax dispute under Nigerian law, the concerns voiced in Pemex did not apply—namely, the agreement did not clearly call for this dispute to be arbitrated. The Court therefore held in NNPC’s favour on this point.
  • Retroactivity. Esso argued that the Nigerian courts’ “unprecedented” decisions to hold this dispute not arbitrable serve as a retroactive application of the law. The Court considered that the Nigerian Court of Appeal conducted a fulsome analysis to determine whether tax disputes were arbitrable and whether the dispute at bar was a tax dispute stating that while the Court was sympathetic to Esso’s situation, it was in no position to pass upon the Nigerian courts’ interpretation of Nigerian law or upon the sufficiency of its precedent. The Court held that the Nigerian courts’ holding did not offend basic standards of justice from the point of view of the United States.

Its conclusion on the application of Pemex was as follows:

“In sum, although a close call, this Court finds that the Pemex considerations favor NNPC. Despite the seemingly anomalous rulings by the Nigerian courts—i.e., that NNPC is liable but that no damages can be recovered—and the alter ego relationship between NNPC and Nigeria, this case does not raise the concerns animating the Second Circuit’s decision in Pemex. Here, NNPC contended “[f]rom the outset of [arbitral] proceedings . . . that the Tribunal lacked jurisdiction because the dispute between Petitioners and NNPC was allegedly a ‘tax dispute,’ rather than a contractual one.” (Atake Decl. ¶ 23.) Moreover, this is not a case where the Nigerian government changed the law after Esso had the Award in hand. Accordingly, and because this Court must act with “trepidation and reluctance” in enforcing an arbitral award that has been set aside at the seat of the arbitration, it declines to confirm the Award under Pemex. See Baker Marine, 191 F.3d at 197 n.3 (“Recognition of the Nigerian [annulment of the arbitral award] in this case does not conflict with United States public policy.”)”

Due Process

In relation to Esso’s further argument – due process – Esso argued that because it expected substantial delays in receiving a ruling on its appeals (a minimum of 4-6 years), its due process rights have been violated. However, Esso did not cite any authority to support the proposition that a court should confirm a $1.799 billion award that was set aside in its home country because of a lengthy appeals process. Further, in relation to Esso’s argument that any judgment entered in Nigeria would be difficult to collect there was also meritless since (i) if Esso received a judgment in Nigeria, it was free to convert that judgment to a United States judgment, and (ii) Esso – a Nigerian company – executed a contract in Nigeria with another Nigerian corporation containing an arbitration clause requiring any arbitration to be held in Nigeria under Nigerian law, and it then sought to confirm the Award in Nigeria; it could not now reasonably complain that its efforts to collect will be frustrated in Nigeria.

The Court concluded:

“Under the New York Convention, a court may refuse to confirm an award when it “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.” Yusuf Ahmed, 126 F.3d at 20 (quoting New York Convention art. V, ¶ (1)(e)). Indeed, “a final judgment obtained through sound procedures in a foreign country is generally conclusive.” Ackermann, 788 F.2d at 837. And the public policy exception that Esso primarily relies on is narrow, and “[t]he standard is high, and infrequently met.” Pemex, 832 F.3d at 106 (alteration in original). For the foregoing reasons, this Court is not persuaded that it should confirm the Award that has been set aside in Nigeria.”

See HERE for a review of previous cases dealing with awards that have been both enforced and refused enforcement where the award has been set aside in the seat court.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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