PDV Sweeny, Inc. et al v. ConocoPhillips Company et al
Filing
31
MEMORANDUM AND ORDER. The Petitioners' petition to vacate is DENIED, while the Respondents' cross-petition to confirm, recognize, and enforce the award is GRANTED. This resolves Dkt. No. 23. The Clerk of Court is instructed to terminate the case. Granting 23 Motion to Confirm Arbitration (Notice of Cross-Petition to confirm, recognize and enforce the arbitration Award). Document filed by ConocoPhillips Company, Sweeny Coker Investor Sub, LLC. (Signed by Judge Alison J. Nathan on 9/1/2015) (rjm)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PDV Sweeny, Inc., et al.,
Petitioners,
14-cv-5183 (AJN)
-vConocoPhillips Co., et al.,
MEMORANDUM &
ORDER
Respondents.
ALISON J. NATHAN, District Judge:
This case arises out of the Partial Award issued by an International Court of Arbitration
panel (the "Panel") in a commercial dispute between former joint partners in an oil refining
operation. As part of that operation, PDV Sweeny, Inc. ("PDV Sweeny") and PDV Texas, Inc.
("PDV Texas" and collectively with PDV Sweeny, the "Petitioners") acted as suppliers of
Venezuelan crude oil. Respondents ConocoPhillips Company ("ConocoPhillips") and Sweeny
Coker Investor Sub, LLC ("Sweeny Sub" and collectively with ConocoPhillips, the
"Respondents") managed the facility which processed the crude oil into saleable products.
Disagreements between the parties led to the triggering of a contract provision which
automatically dissolved the joint venture. After the dissolution, the parties proceeded to
arbitration before the Panel. Petitioners now move to vacate a portion of the Panel's ruling,
while Respondents cross-petition for the Court to confirm, recognize, and enforce the award.
See Dkt. No. 23. For the reasons below, Petitioners' petition is DENIED and Respondents'
cross-petition is GRANTED.
I.
BACKGROUND
A.
Parties
This case principally concerns a joint venture between ConocoPhillips and Petroleos de
Venezuela, S.A. ("PDVSA"). See Dkt. No. 28, Ex. 1 ("Partial Award") i11. The venture
involved a number of subsidiaries and a complex web of agreements governing the supply and
management of the oil refining operation. ConocoPhillips is a Delaware corporation and the
parent of Sweeny Sub. Id. ii 13. PDVSA is a Venezuelan corporation wholly owned by the
Venezuelan government. Id. i110. PDV Sweeny and PDV Texas are both indirectly wholly
owned subsidiaries of PDVSA. Id.
~if
8, 9. Two entities comprised the actual joint venture:
Merey Sweeny, L.P., a Delaware limited partnership, and Sweeny Coker L.L.C. ("Sweeny
Coker"), a Delaware limited liability corporation. Id.
~
16. PDV Sweeny and Sweeny Sub were
limited partners in Merey Sweeny, L.P., with each entity possessing a 49.5 percent stake. Id.
The remaining 1 percent interest in the partnership was controlled by Sweeny Coker, which itself
was owned in equal part by PDV Texas and ConocoPhillips. Id.
B.
The Joint Venture
In the late 1990s, ConocoPhillips, PDVSA, and their respective subsidiaries commenced
a joint venture to design, construct, own, supply, and operate refining facilities within the
broader confines of a large refining complex owned by ConocoPhillips in Texas. Id.
was known as the "Sweeny Refinery." Id.
~
~
1. This
110. PDVSA and its affiliates supplied crude oil
from Venezuela which was then processed by ConocoPhillips, which had greater refining and
operational expertise than PDVSA. Id.
~
111. ConocoPhillips' interest in the arrangement was
that it was able to secure a long-term, low-cost source of crude oil from Venezuela, which it was
2
then able to convert into high-value end products. Id The Sweeny Refinery and other ancillary
facilities were owned by Merey Sweeny, L.P. Id
~
114.
A number of agreements governed the relationship between the various parties to the
joint venture. The obligation of PDVSA and its affiliates to supply ConocoPhillips and the
Sweeny refinery with Venezuelan crude oil was governed by the Amended and Restated Crude
Oil Supply Agreement (the "COSA"). See Pizzurro Deel., Ex. 3; Partial
COSA, signed in 1999, is governed by Venezuelan law. See Partial
Award~
Award~
119. The
119. A related
agreement was the Amended and Restated Supplemental Crude Oil Supply Agreement (the
"SCOSA") between PDVSA and ConocoPhillips. The SCOSA, also governed by Venezuelan
law, obligated PDVSA to assume the responsibility for supplying replacement crude oil, or pay
seller damages, to ConocoPhillips in the event that one of its subsidiaries was prevented from
supplying crude oil under the COSA due to the actions of the Venezuelan government. See
Pizzurro Deel., Ex. 4; Partial
C.
Award~
121.
The Transfer Agreement and the Call Option
The agreement most directly at issue in this case, however, is the Transfer Agreement.
That agreement, governed by New York law, restricted the manner in which the patties could
transfer joint venture interests. See Partial
Award~
118. The Transfer Agreement delineated
two categories of joint venture interest transfers. The first, "authorized transfers," were transfers
voluntarily made by the patties, which the Agreement subjected to certain restrictions. See
Pizzurro Deel., Ex. 2, Art. III. The second category, "mandatory transfers," concerned certain
compulsory transfers of joint venture assets. Id., Art. IV. Mandatory transfers acted as a remedy
for ConocoPhillips in the event of PDVSA's breach. See Partial
Award~
118. This was referred
to as the "Call Option," which could be triggered by one of several specifically identified "call
3
events." See Pizzurro Deel., Ex. 2, Art IV., Sec. 4.1. Two call events identified by the Transfer
Agreement are relevant to this case. The first occurred if a PDVSA subsidiary failed to meet its
obligation to supply crude oil under the COSA and that failure remained uncured for 90 days.
Id. Second, and similarly, a call event occurred if PDVSA failed to make a payment obligation
under the SCOSA and that failure remained uncured for 90 days. Id. Under either scenario,
ConocoPhillips would have the right to exercise the Call Option, automatically allowing it to
acquire the joint venture interest of PDVSA and its subsidiaries. See Partial
Award~
118.
In the event that one of the parties elected to exercise the Call Option, the Transfer
Agreement provided two formulas for calculating the purchase price.
Id.~
165. The party
electing to exercise the option held the prerogative to choose the formula. Id. Under the first
formula, the purchase price was equal to half of eighty percent of the fair value of Merey
Sweeny, L.P. 1 Id. The second formula set the purchase price equal to eighty percent of the sum
of the party's capital contributions to the joint venture (plus any outstanding obligations of the
party), minus all capital distributions from the joint venture to the party. Id.
Notably, exercise of the Call Option did not automatically trigger the dissolution of the
COSA and the SCOSA, meaning that PDVSA and its affiliates would still be contractually
required to supply ConocoPhillips with Venezuelan crude oil even if they lost their share of the
joint venture. Id.
~
176. If PDVSA and its affiliates failed to supply crude oil to ConocoPhillips,
the COSA and SCOCA both specified that they would be liable for a specific sum of seller
damages. Id.
~~
119.
1
The fair value was to be determined by the expected future net cash flows of the partnership. See Pizzurro Deel.,
Ex. 4 at Exhibit B.
4
D.
The Dissolution of the Joint Venture
In January 2009, the PDVSA parties curtailed their supply of Venezuelan crude oil to
ConocoPhillips due, allegedly, to cutbacks in the production and export of crude oil from
Venezuela. Id
~il
124-126. ConocoPhillips claimed it was due seller damages under the COSA
and SCOSA and the parties began a correspondence regarding the extent of PDVSA's liability.
Id.~~
127-129. On August 28, 2009, ConocoPhillips informed PDV Sweeny and PDV Texas
that it was exercising the Call Option under the Transfer Agreement. Id
~
136. ConocoPhillips
elected to buy the PDVSA share of the joint venture according to the second contractual formula,
which required ConocoPhillips to pay eighty percent of the PDVSA parties' capital contributions
to the joint venture minus all capital distributions from the joint venture to the PDVSA parties.
Id.
~
165. Because the PDVSA parties had received dividends from the joint venture totaling
over $1.1 billion, far in excess of their capital contribution of approximately $270 million, this
formula yielded a purchase price of zero dollars. Id.
i!
168. In keeping with the Transfer
Agreement, ConocoPhillips was also obligated to assume the PDVSA parties' outstanding debt
obligations, which amounted to approximately $195 million. Id.
~
169. ConocoPhillips elected
not to terminate the COSA or SCOSA and PDVSA and its affiliates resumed shipments of crude
oil in October 2009.
Id.~
E.
164.
The Arbitration
The PDVSA parties commenced arbitration under the ICC Rules of Arbitration on
February 25, 2010. Id.
il~
29-30. The arbitration concerned a range of disputes between the
parties, only one of which is relevant to the present action. Namely, the Petitioners challenged
the validity of the Call Option, alleging that it acted as an unenforceable penalty clause under
New York contract law. Id.
~
2. Petitioners contended that the Call Option acted as a penalty
5
because it resulted in a purchase price of zero dollars for their share of the joint venture, which
the ConocoPhillips expert witness to the arbitration valued between $352 million and $540
million. Id. ~il 172-177; Pizzurro Deel., Ex. 5. Accordingly, they theorized, its purpose was to
compel their performance, rather than provide ConocoPhillips with adequate damages.
On April 14, 2014, the Panel announced its Partial Award. The Panel concluded that the
Call Option was valid and enforceable under New York law and could not constitute an
impermissible contractual penalty. Id. ~~ 178-187. The Panel further concluded that the Call
Option acted as a valid termination provision for the joint venture, rather than as a liquidated
damages or penalty clause. Id.~~ 201-206. 2 Petitioners now move to vacate that portion of the
Partial Award on the theory that it violates the public policy of New York and the United States.
Respondents, in turn, cross-petition for confirmation of the Partial Award and Final Award
pursuant to 9 U.S.C. § 9.
II.
JURISDICTION
The arbitration at issue in this case involved parties from both the United States and
Venezuela and is therefore subject to two international conventions concerning enforcement of
arbitral awards. First, both countries are signatories to the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). See 21
U.S.T. 2517; 330 U.N.T.S. 38 (Dec. 29, 1970). The New York Convention governs the
enforcement of arbitral awards stemming from disputes that are "commercial and ... not entirely
between citizens of the United States." Republic o.f Ecuador v. Chevron Corp., 638 F.3d 384,
391 (2d Cir. 2011) (quoting Motorola Credit Corp. v. Uzan, 388 F.3d 39, 49 (2d Cir. 2004)). See
2
Although it is not at issue in Petitioners' Motion to Vacate, the Panel rendered its Final A ward on August 18,
2014. See Prevatt Deel., Ex. G. The Final A ward granted ConocoPhillips certain pre- and post-award interest, in
addition to ordering the Petitioners to pay forty percent of Respondents' legal costs and expenses. Id. Respondents'
cross-petition seeks confirmation of the Final A ward in addition to the entirety of the Partial Award.
6
also 9 U.S.C. § 202. This case further falls under the Inter-American Convention on
International Commercial Arbitration ("Inter-American Convention") because it arose "from a
commercial relationship between citizens of signatory nations" to that Convention. Sanluis
Developments, L.L.C. v. CCP Sanluis, L.L.C., 498 F. Supp. 2d 699, 702 (S.D.N.Y. 2007).
The Inter-American Convention specifies that "when both Conventions apply, if a
majority of the parties io the arbitration agreement are citizens of states that are signatories to the
Inter-American Convention and are member states of the Organization of American States, the
Inter-American Convention must govern." Energy Transp., Ltd. v. M V San Sebastian, 348 F.
Supp. 2d 186, 199 (S.D.N.Y. 2004) (citing 9 U.S.C. § 305). The parties to this case hail from
Venezuela and the United States, both of which are signatories to the convention and members of
the Organization of American States. The Inter-American Convention therefore governs. This is
not particularly consequential, as the Inter-American Convention is substantively identical to the
New York Convention and applies concomitantly in this case. See, e.g., Productos Mercantil es
E Industrial es, SA. v. Faberge USA, Inc., 23 F .3d 41, 45 (2d Cir. 1994) (discussing history of
the conventions and concluding that "Congress intended the Inter-American Convention to reach
the same results as those reached under the New York Convention."); TermoRio SA. E.SP. v.
Electranta SP., 487 F.3d 928, 933 (D.C. Cir. 2007) ("the relevant provisions of the [InterAmerican] Convention and the New York Convention are substantively identical").
The Federal Arbitration Act ("FAA") implements the New York Convention and InterAmerican Convention domestically and provides that "[a]n action or proceeding falling under
[either] Convention shall be deemed to arise under the laws and treaties of the United States.
The district courts of the United States ... shall have original jurisdiction over such an action or
proceeding, regardless of the amount in controversy." 9 U.S.C. § 203. See also 9 U.S.C. § 302.
7
Two kinds of actions or proceedings fall under the New York Convention and therefore give rise
to subject matter jurisdiction in this Court: first, a petition for an order confirming an arbitration
award, see 9 U.S.C. § 207, and second, a petition for an order compelling arbitration pursuant to
an arbitration agreement. See 9 U.S.C. § 206. Only one kind of action falls under the lnterAmerican Convention, namely, a petition for an order to confirm an arbitration award. See 9
U.S.C. § 302. Because Respondents cross-petition for an order confirming the Partial Award and
Final Award, both the New York Convention and Inter-American Convention, as implemented
by the FAA, provide a jurisdictional basis for this dispute under 28 U.S.C. § 1331.
However, it is important to note that Petitioners' motion to vacate, standing alone, would
necessitate a distinct basis for jurisdiction. Neither the New York Convention nor the InterAmerican Convention "makes [any] mention of vacatur actions. Courts that have spoken on the
issue, even in dicta, universally agree that federal district courts do not have original jurisdiction
to hear a motion to vacate an arbitral award pursuant to the Convention, when the motion to
vacate is the sole basis for subject matter jurisdiction." Ingaseosas Int'! Co. v. Aconcagua
Investing Ltd., 09-cv-23078, 2011WL500042, at *3 (S.D. Fla. Feb. 10, 2011) affd, 479 F.
App'x 955 (11th Cir. 2012) (collecting cases) (emphasis added). This is ultimately a moot
consideration here because, first, Respondents' cross-petition for confirmation establishes
jurisdiction and, second, both conventions allow for review of an arbitral award under the
domestic law of the state in which the arbitration occurred and the arbitration in this case
occurred in New York. See 21 U.S.T. at 2520, Art. V(l)(e); Inter-American Convention, Art.
V(l)(e). See also Lander Co. v. MMP Investments, Inc., 107 F.3d 476, 478 (7th Cir. 1997)
(Posner, J.) ("[T]he New York Convention contains no provision for seeking to vacate an award,
although it contemplates the possibility of the award's being set aside in a proceeding under local
8
law ... and recognizes defenses to the enforcement of an award.") However, this presages a
critical issue in this case; namely, that the Inter-American Convention provides no independent
basis for vacatur except for those bases available under domestic law.
Ill.
PETITION TO VACA TE THE AW ARD
Petitioners request that the Court vacate the Partial Award to the extent it found the Call
Option provision of the Transfer Agreement to constitute a valid and enforceable contract clause,
which they contend in fact acted as an unenforceable penalty. As a legal basis for vacatur,
petitioners argue that "Article 5(2)(b) of the Inter-American Convention empowers this Court to
vacate an arbitral decision if 'the recognition or execution of the decisions would be contrary to
the public policy ('ordre public') of that State."' See Pet's
Br.~
45. Petitioners' argument is
premised on a misreading of the Inter-American Convention and a misunderstanding of the
statutory framework governing the Court's ability to vacate and confirm awards. As the Court
now explains, Petitioners' motion to vacate must be denied.
A.
Relevant Legal Standard
In their motion papers, Petitioners conflate two distinct issues before the Court: the power
to vacate an award and the power to recognize, confirm, and enforce an award under the InterAmerican Convention. Petitioners move the Court to vacate a portion of the Panel's Partial
Award, yet fail to delineate the proper legal basis for vacating awards under the Convention,
instead concluding without basis that "this Court is tasked with undertaking a de nova review of
the tribunal's legal analysis." Pet's
Br.~
55. Petitioners cite no precedent holding that a de
nova review of arbitral award is appropriate. Moreover, such a standard of review would
contradict "the strong public policy in favor of international arbitration," which mandates a "very
limited" review of arbitral awards under the Inter-American Convention "in order to avoid
9
undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long
and expensive litigation." Encyclopaedia Universalis SA. v. Encyclopaedia Britannica, Inc., 403
F.3d 85, 90 (2d Cir. 2005). Because Petitioners have failed to do so, the Court now sets out the
appropriate standard for reviewing their petition.
The logical starting point for the Court's analysis is the Inter-American Convention,
which, as explained, governs the parties' petitions. "The [Inter-American Convention], however,
does not discuss vacating or modifying arbitration awards." Am. Life Ins. Co. v. Parra, 269 F.
Supp. 2d 519, 524 (D. Del. 2003). See also Lander, 107 F.3d at 4 78 ("[T]he [Inter-American]
Convention contains no provision for seeking to vacate an award"). Rather, Article V of the
convention provides that "recognition and execution of the decision may be refused" on a
number of grounds. See Inter-American Convention, Art. V. These grounds have been
described within this Circuit as providing "carefully specified defenses" to the recognition of an
award. Corporacion Mexicana de Mantenimiento Integral, S. de R.L. de C. V v. PemexExploracion y Produccion, 962 F. Supp. 2d 642, 654 (S.D.N.Y. 2013) (quoting Figueiredo
Ferraz E Engenharia de Projeto Ltda. v. Republic of Peru, 665 F.3d 384, 397 (2d Cir. 2011)).
The New York Convention provides identical grounds for refusing to recognize an arbitral award
and courts within this Circuit have similarly described these grounds as "defenses" to
enforcement. See, e.g., Telenor Mobile Commc'ns AS v. Storm LLC, 584 F.3d 396, 405 (2d Cir.
2009); Zeiler v. Deitsch, 500 F.3d 157, 164 (2d Cir. 2007) (citing Encyclopaedia Universalis,
403 F.3d at 90); MGM Prods. Grp., Inc. v. Aeroflot Russian Airlines, 573 F. Supp. 2d 772, 775
(S.D.N.Y. 2003) affd, 91 F. App'x 716 (2d Cir. 2004) ("In enforcement proceedings under the
[New York] Convention, a court may consider only the specific defenses listed in Article V as
grounds for refusing to enforce an award.") In other words, the Convention contemplates
10
various defenses to a petition to enforce an award, but does not provide an independent basis for
seeking vacatur. See YusufAhmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15, 22 (2d
Cir. 1997).
While the Inter-American Convention provides no explicit allowance for vacatur, this does
not mean that no grounds for vacatur exist for awards governed by the Convention. As part of its
implantation by the FAA, the "Inter-American Convention incorporates the [Federal Arbitration
Act's] terms unless they are in conflict with the Inter-American Convention's terms." Productos
Mercantiles, 23 F.3d at 45 (citing 9 U.S.C. § 307). The FAA's provisions regarding vacatur "do
not conflict with the Inter-American Convention's terms." Hernandez v. Smart & Final, Inc., 09cv-2266 (BEN) (NLS), 2010 WL 2505683, at *4 (S.D. Cal. June 17, 2010). "Accordingly, a court
applying the [Inter-American] Convention may vacate an arbitration award based on the grounds
recognized under the FAA." Sanluis Developments, 498 F. Supp. 2d at 702. See also Banco de
Seguros del Estado v. Mut. Marine Offices, Inc., 257 F. Supp. 2d 681, 684-85 (S.D.N.Y. 2003)
(holding that a court applying the Inter-American Convention may vacate an arbitration award
based on the grounds recognized in 9 U.S.C. § 1O(a)) (citing International Ins. Co. v. Caja
Nacional de Ahorro v Seguro, OO-cv-6703, 2001 WL 322005, at *3 (N.D. Ill. Apr. 2, 2001), ajj'd,
293 F.3d 392 (7th Cir. 2002)). Section 10 of the FAA provides that a district court "may make an
order vacating the award upon the application of any party to the arbitration" in four
circumstances: "(l) where the award was procured by corruption, fraud, or undue means; (2)
where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the
arbitrators were guilty of misconduct in refusing to postpone the hearing ... or in refusing to hear
evidence ... ; or (4) where the arbitrators exceeded their powers ... " See 9 U.S.C. § lO(a).
11
Finally, the Second Circuit has recognized one non-statutory path to vacatur under the
New York Convention and the Inter-American Convention. "In addition to the statutory
provisions, an award may be vacated if it was rendered in 'manifest disregard of the Jaw."'
Banco de Seguros, 257 F. Supp. 2d at 685 (quoting Greenberg v. Bear, Stearns & Co., 220 F.3d
22, 28 (2d Cir. 2000)). The continued existence of this doctrine has been cast into doubt by the
Supreme Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008),
which held that parties to an arbitration could not contract around provisions of the FAA
governing vacatur and modification. See T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592
F.3d 329, 342 (2d Cir. 2010) (noting the "ambiguity surrounding the interpretation of the
manifest disregard standard in the wake of Hall Street"). See also J.P. Duffy, Hall Street One
Year Later: The Manifest Disregard Debate Continues, 19 Am. Rev. Int'! Arb. 193, 196 (2008)
(detailing the emergence of a circuit split on the continued applicability of the manifest disregard
doctrine).
The Second Circuit has concluded that the manifest disregard doctrine "remains a valid
ground for vacating arbitration awards," but cautions that it be treated primarily as a form of
"judicial gloss" on the specific grounds for vacatur specified by the FAA. See Stolt-Nielsen SA
v. Anima!Feeds Int'! Corp., 548 F.3d 85, 94 (2d Cir. 2008). On separate grounds, that decision
was reversed and remanded by the Supreme Court, although the Court's opinion explicitly
refused to opine on the continued vitality of the manifest disregard doctrine. See Stolt-Nielsen
SA. v. AnimalFeeds Int'! Corp., 559 U.S. 662, 672 n.3 (2010). Accordingly, courts within the
Second Circuit have continued to routinely apply the doctrine. See, e.g., Pasha v. Janseshki, 14cv-1870, 2015 WL 1061164, at * 1 (2d Cir. Mar. 12, 2015); Sayigh v. Pier 59 Studios, L. P., 11cv-1453 (RA), 2015 WL 997692, at *5 (S.D.N.Y. Mar. 5, 2015); Trustees.for the Mason Tenders
12
Dist. Council Welfare Fund, Pension Fund, Annuity Fund, & Training Program Fund v.
Nacirema Envtl. Servs. Co., 13-cv-3574 (SAS), 2015 WL 1026695, at *l (S.D.N.Y. Mar. 9,
2015).
The doctrine allows for the vacatur of an award "only if a reviewing court ... find[ s]
both that ( 1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored
it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly
applicable to the case." Wallace v. Buttar, 378 F.3d 182, 189-90 (2d Cir. 2004) (internal
citations removed). The Second Circuit has emphasized that the doctrine requires more than
"error or misunderstanding with respect to the law." Id. (quoting Hoe;fi v. MVL Group, Inc., 343
F.3d 57, 69 (2d Cir. 2003)). In sum, "[a] federal court cannot vacate an arbitral award merely
because it is convinced that the arbitration panel made the wrong call on the law. On the
contrary, the award should be enforced, despite a court's disagreement with it on the merits, if
there is a barely colorable just(fication for the outcome reached." Id. (internal quotations
removed) (emphasis in original).
The Second Circuit has steadfastly refused to expand the possible routes to vacatur under
the Inter-American Convention and the New York Convention beyond the manifest disregard
doctrine and those grounds explicitly enumerated in the FAA. See Porzig v. Dresdner,
Kleinwort, Benson, N Am. LLC, 497 F.3d 133, 139 (2d Cir. 2007) ("To the extent our sister
courts may have broadened somewhat the path to vacatur of an arbitration award, we decline to
wander from the narrow one embodied in our own jurisprudence. Thus, we will vacate an award
only upon finding a violation of one of the four statutory bases [in the FAA], or, more rarely, if
we find a panel has acted in manifest disregard of the law.") See also Vaughn v. Leeds, Morelli
& Brown, P.C., 315 F. App'x 327, 330 (2d Cir. 2009) (only the "severely limited" and "highly
13
deferential" doctrine of manifest disregard exists as a non-statutory basis for vacatur).
Accordingly, the Court now must determine whether or not Petitioners are entitled to vacatur
under the statutory grounds of the FAA or the doctrine of manifest disregard.
B.
Application
Because Petitioners seek to set aside the Partial A ward on the basis of a non-existent
public policy rationale for vacatur, their motion does not directly address whether the arbitral
Panel manifestly disregarded the law or whether one of the four statutory grounds for vacatur
under the FAA is applicable. The Court will construe Petitioners' motion as seeking to vacate
the Partial A ward under those legal grounds actually available to them.
Fundamentally, Petitioners contend that the Panel grossly misapplied well-established
New York contract law regarding the enforceability of contract provisions operating as a penalty.
See Pet's
Br.~~
55-82. They do not allege anything falling within the ambit of the FAA's
vacatur provisions, such as that any members of the Panel were impartial, corrupt, refused to
hear evidence, exceeded their powers, or otherwise engaged in some form of malfeasance.
Accordingly, Petitioners' only recourse for vacatur is the "severely limited" doctrine of manifest
disregard. See Vaughn, 315 F. App'x at 330. The Second Circuit has held that manifest
disregard may only be found where "the arbitrator knew of the relevant principle, appreciated
that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted
the governing law by refusing to apply it." Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304
F.3d 200, 217 (2d Cir. 2002).
There is no dispute about the existence of New York's well-established policy of refusing
to enforce penalty provisions in contracts. See, e.g., Rattigan v. Commodore Jnt'l Ltd., 739 F.
Supp. 167, 169 (S.D.N.Y. 1990) (citing Brecher v. Laikin, 430 F.Supp. 103, 106 (S.D.N.Y.
14
1977)). However, it is far from clear that that doctrine controlled the disposition of this case.
Respondents took the position that a contract clause can only be deemed an unenforceable
penalty if it may also be categorized as a liquidated damages clause. See Partial Award ~il 178187. Petitioners, on the other hand, argued that contractual penalties were not necessarily
concomitant with liquidated damages clauses and that any clause could be deemed a penalty so
long as it met one of a number of tests established by New York law. Id.
~~
172-177. The Panel
ultimately credited the Respondents' position, concluding that to "find that the concept of
unenforceable penalty is independent from the concept of liquidated damages would unduly
depart from New York law." Id.
~
189. Because the Panel further concluded that the Call
Option acted as a termination provision, rather than a liquidated damages provision, it concluded
there was no need to determine whether the clause could be deemed a penalty. Id.
Petitioners insist that the Panel erred. The Court does not discount that possibility, but
Petitioners have nonetheless failed to meet their "burden of demonstrating the existence of a
clearly governing legal principle and the arbitrator's manifest disregard of such a principle." Jn
re Arbitration Between Atherton & Online Video Network, Inc., 274 F. Supp. 2d 592, 595
(S.D.N.Y. 2003) (internal quotation removed). "A legal principle clearly governs the resolution
of an issue before the arbitrator if its applicability is 'obvious and capable of being readily and
instantly perceived by the average person qualified to serve as an arbitrator."' Westerbeke, 304
F.3d at 209 (quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933
(2d Cir. 1986)).
No such clarity exists in this case. Neither party has introduced any legal authority that
conclusively answers the question put before the Panel concerning whether the Call Option acted
as a penalty. Petitioners introduce two authorities on the issue. The first, the Restatement
15
(Second) of Contracts, notes in a comment that a "court will look to the substance of the
agreement to determine whether ... the parties have attempted to disguise a provision for a
penalty," including those that "purport[] to place a valuation on property to be delivered."
Restatement (Second) of Contracts § 356 cmt c (1981 ). But the actual substance of that section
of the Restatement, notably titled "Liquidated Damages and Penalties," states unequivocally that
a "term fixing unreasonably large liquidated damages is unenforceable on grounds of public
policy as a penalty." Id. § 356(1) (emphasis added). It was hardly unreasonable for the Panel to
conclude on the basis of this authority that a 'term fixing unreasonably large liquidated damages'
is a prerequisite to deeming a clause 'unenforceable on grounds of public policy as a penalty.'
Petitioners further cite In re 0. P. M Leasing Servs., Inc., 23 B.R. 104 (Bankr. S.D.N.Y.
1982), which stands only for the proposition that labels are irrelevant in determining whether a
clause acts as a penalty. But nothing in the Partial Award contradicted that basic proposition. In
fact, the Partial Award plainly stated that the "Tribunal agrees with the Claimants [i.e.
Petitioners] that the label given to a provision does not matter." See Partial Award ir 189.
Nothing else in that case supports the Petitioners' argument that unenforceable penalties exist
independently of liquidated damages clauses. Indeed, the facts of that case specifically
concerned a liquidated damages clause and the court held nothing more than that it would "not
enforce a liquidated damages clause that is in reality a penalty." Id. at 111. Petitioners may
therefore have demonstrated the existence of a well-established doctrine of New York law, but
they have not demonstrated its obvious application to this case.
Additionally, Petitioners have failed to demonstrate that the Panel, though aware of
governing precedent, "refused to apply it or ignored it altogether." Wallace, 378 F.3d at 189-90.
In fact, the Panel considered the position of both parties extensively, including the Petitioner's
16
argument that the Call Option acted as a penalty. See Partial Report iii[ 172-187. That the Panel
ultimately credited the Respondents' position is not evidence of manifest disregard for the law.
In sum, "[t]here is no explicit evidence in the record that any of the arbitrators believed that
[unenforceable penalty] law applied. Nor is there any deliberateness or willfulness exhibited
within the award that shows the arbitrators' intent to flout the law. The arbitrators' reasoning ...
does not strain[] credulity." See Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471,
484 (2006) (citing Westerbeke, 304 F .3d at 216) (internal quotations removed). The Panel was
aware of the legal principles that the Petitioners believe supported their position, but ultimately
determined that they did not apply. That is not a flouting of the adjudicative process, but rather
its usual functioning. See Shanghai Foodstuffs Imp. & Exp. Corp. v. Int'! Chem., Inc., 99-cv3320 (RCC), 2004 WL 213019, at *3 (S.D.N.Y. Feb. 4, 2004) (citing Banco de Seguros de!
Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 263 (2d Cir. 2003)) ("There is nothing to
suggest that the tribunal determined that the UCC applied, or, more importantly, that it
acknowledged its application but consciously decided to ignore the provisions. There can be no
man(fest disregard ifthere is no acknowledgment by the arbitrators that the UCC applied.")
(emphasis in original).
Ultimately, Petitioners argue that the Panel identified the relevant rule, but erred in its
application. But manifest disregard "requires more than a mistake of law or a clear error in fact
finding." Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002) (citing Siegel
v. Titan Indus. Corp., 779 F.2d 891, 892-93 (2d Cir. 1985)). See also Saxis S.S. Co. v. Mult(facs
Int'! Traders, Inc., 375 F.2d 577, 582 (2d Cir. 1967) (holding that manifest disregard requires
"something beyond and different from a mere error in the law or failure on the part of the
arbitrators to understand or apply the law.") Regardless of whether the Panel was correct in its
17
ultimate conclusion, it considered the arguments of both parties, reviewed the pe1iinent facts and
state case law, and attempted its own reasoned application of New York law to the facts of the
case. See Partial Award
~if
188-211. The Partial Award provides an explanation of why the
Panel credited the Respondents' version of the law over Petitioners' and certainly offers a
"barely colorable justification" of the result. See Wallace, 378 F.3d at 190. "Clearly there did
not exist here 'more than error or misunderstanding with respect to the law.'" In re Arbitration
Between PHS. VAN OMMEREN N. V v. JNO. McCall Coal Exp. Corp., 89-cv-5668 (JMW),
1990 WL 114744, at *4 (S.D.N.Y. Apr. 27, 1990) (quoting Bobker, 808 F.2d at 933).
Because Petitioners have failed to demonstrate that the Panel manifestly disregarded
relevant law, and because the statutory grounds for vacatur in the FAA are clearly inapposite to
this case, Petitioners' motion to vacate is denied.
IV.
CROSS-PETITION TO CONFIRM, RECOGNIZE, AND ENFORCE THE
AWARD
Respondents cross-petition for confirmation of the Panel's Partial Award and Final
Award. For the reasons below, the cross-petition is granted.
A.
Legal Standard
The Respondents' cross-petition is similarly governed by the Inter-American Convention,
which applies co-extensively with the New York Convention. See Productos Mercantiles, 23
F.3d at 45. Typically, "[u]nder the Convention, the district court's role in reviewing a foreign
arbitral award is strictly limited: 'The 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."' Yusuf, 126 F.3d at 19 (quoting 9 U.S.C. § 207). See also 9 U.S.C. § 302.
"Normally, confirmation of an arbitration award is 'a summary proceeding that merely makes
what is already a final arbitration award a judgment of the court."' D.H Blair & Co. Inc. v.
18
Gottdiener, 462 F.3d 95, 110 (2d Cir. 2006). See also F. Hoffmann-La Roche Ltd. v. Qiagen
Gaithersburg, Inc., 730 F. Supp. 2d 318, 332 (S.D.N.Y. 2010). This limited review is necessary
to "avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and
avoiding long and expensive litigation."' Encyclopaedia Universalis, 403 F.3d at 90 (quoting
Yusuf; 126 F.3d at 23).
Despite the normally routine nature of confirming arbitral awards, Article V of the InterAmerican Convention provides that the "recognition and execution of an arbitral decision may
also be refused if the competent authority of the State in which the recognition and execution is
requested finds: ... [t]hat the recognition or execution of the decision would be contrary to the
public policy ("ordre public") of that State." See Inter-American Convention, Art. V(2)(b). 3
Accordingly, the Petitioners' public policy arguments do find a home in the Convention's
specifically enumerated defenses to enforcement, recognition, and confirmation of an arbitral
award, even though public policy provides no affirmative ground for vacatur under the InterAmerican Convention or FAA. See, e.g., Lander, 107 F.3d at 478; Yusuf, 126 F.3d at 22.
Nonetheless, "the public policy defense should be construed narrowly." Waterside
Ocean Navigation Co. v. International Navigation Ltd., 737 F.2d 150, 152 (2d Cir. 1984)
(quoting Fotochrome, Inc. v. Copa! Co., 517 F.2d 512, 516 (2d Cir. 1975)). A more "expansive
construction of this defense would vitiate the Convention's basic effort to remove preexisting
obstacles to enforcement." Karen Mar. Ltd. v. Omar Int'!, Inc., 322 F. Supp. 2d 224, 226
(E.D.N.Y. 2004) (quoting Parsons & Whittemore Overseas Co. v. Societe Generate de
L'lndustrie du Papier, 508 F.2d 969, 973-74 (2d Cir. 1974)). Accordingly, Article V(2)(b) has
been read to "encompass only those circumstances where enforcement would violate our most
3
The New York Convention contains an identical provision. See 21 U.S.T. 2517, Art. V(2)(b ).
19
basic notions of morality and justice." Telenor, 584 F.3d at 411 (quoting Europcar Italia Sp.A.
v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998)). Moreover, the public policy at stake
must be "well defined and dominant, and is to be ascertained by reference to the laws and legal
precedents and not from general considerations of supposed public interests." Yukos Capital
S.A.R.L. v. GAO Samarane.ftegaz, 963 F. Supp. 2d 289, 299 (S.D.N.Y. 2013) (quoting United
Paperworkers Int'! Union, 484 U.S. at 43).
Unlike the manifest disregard doctrine and the FAA, the Second Circuit has sanctioned
no extra-statutory grounds for refusing to recognize, confirm, or enforce an arbitral award under
the New York Convention or Inter-American Convention. Accordingly, "the grounds for relief
enumerated in Article V of the Convention are the only grounds available for setting aside an
arbitral award." Encyclopaedia Universalis, 403 F.3d at 92 (quoting Yusuf; 126 F.3d at 20).
"The party opposing enforcement of an arbitral award has the burden to prove that one of the
seven defenses under the [Inter-American] Convention applies." Telenor, 584 F.3d at 405
(citation omitted). "The burden is a heavy one, as the showing required to avoid summary
confirmance is high." Id. (citation omitted). As the Court now explains, Petitioners have failed
to meet that heavy burden.
B.
Application
As an initial matter, the Court again acknowledges that the prohibition on penalty clauses
in contracts is well-established public policy in New York. See, e.g., Wells Fargo Nw. Bank,
Nat'!. Ass'n. v. Varig-S.A., 02-cv-6078 (JSR), 2003 WL 21508341, at *5 (S.D.N.Y. June 27,
2003) (under New York law, contractual penalties are "void ab initio as a matter of public
policy"). Nonetheless, in light of Petitioners' failure to explain how enforcement of the Partial
20
Award would violate the "most basic notions of morality and justice," the cross-petition must be
granted.
Despite resting their arguments for vacatur and denial of confirmation on public policy
grounds, Petitioners fail to mention the well-established standard for refusing confirmation of an
award due to public policy. See, e.g., Agility Pub. Warehousing Co. K.SC., Prof! Contract
Administrators v. Supreme Foodservice GmbH, 495 F. App'x 149, 151 (2d Cir. 2012) ("We have
repeatedly held that Article V(2)(b) must be construed very narrowly to encompass only those
circumstances where enforcement would violate our most basic notions of morality and justice.")
(internal quotations removed) (emphasis in original). Petitioners offer no explanation of how
enforcement of the Partial or Final Award would violate the most basic notions of morality and
justice.
Indeed, even if they had ventured an argument, Petitioners are unable to meet their heavy
burden of establishing a public policy defense. Assuming, arguendo, the Panel misinterpreted
New York contract law by refusing to deem the Call Option an unenforceable penalty, it is still
the case that "the public policy exception 'is not available for every party who manages to find
some generally accepted principle which is transgressed by the [arbitration] award. Rather the
award must be so misconceived that it 'compels the violation of law or conduct contrary to
accepted public policy."' A. Halcoussis Shipping Ltd. v. Golden Eagle Liberia Ltd., 88-cv-4500
(MJL), 1989 WL 115941, at *2 (S.D.N.Y. Sept. 27, 1989) (quoting Revere Cooper & Brass, Inc.
v. Overseas Private Investment Corp., 628 F.2d 81, 83 (D.C. Cir. 1980), cert. denied, 446 U.S.
983 (1980)). This is prudent because "[a]ll laws, be they procedural or substantive, are founded
on strong policy considerations. Yet not all laws represent this country's 'most basic notions of
morality and justice.' Were it otherwise, the Convention's public policy exception would
21
eviscerate the very goal of the Convention." Coutinho Caro & Co. US.A. v. Marcus Trading,
Inc., 95-cv-2362(AWT), 2000 WL 435566, at *12 (D. Conn. Mar. 14, 2000).
The Panel's alleged misapplication of New York contract law concerning unenforceable
penalties does not violate the state or nation's "most basic notions of morality of justice." Such
notions might be tarnished "if the defendant's due process rights had been violated- for
example, if defendant had been subject to any coercion or any part of the agreement had been the
result of duress." Ameropa AG v. Havi Ocean Co. LLC, 1O-cv-3240 (TPG), 2011 WL 570130, at
*2 (S.D.N.Y. Feb. 16, 2011) (citing Transmarine Seaways Corp. qf'Monrovia v. Marc Rich &
Co. A.G., 480 F. Supp. 352, 358 (S.D.N.Y. 1979)). Petitioners do not allege any violations of
due process or that their right to a fair hearing before the Panel was impugned, only that New
York contract law was misapplied. But "[ e]rroneous legal reasoning or misapplication of law is
generally not a violation of public policy within the meaning of the [Inter-American]
Convention." Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi
Negara, 364 F.3d 274, 306 (5th Cir. 2004). Accordingly, even if the Panel did misapply the law,
that misapplication was not so severe as to threaten core notions of morality and justice.
An opinion from the New York Court of Appeals confirms that the prohibition on
contractual penalties, while significant and well-established, is not so consequential as to warrant
judicial disturbance of an arbitral award. In Matter q/Associated Gen. Contractors, New York
State Chapter, Inc., the parties submitted to arbitrators a number of questions regarding
interpretation of a contract, "including specifically the determination that the damages clause
was not a penalty and was therefore enforceable." 36 N.Y.2d 957, 958-59 (1975). The majority
of the Court concluded that the case posed "no question involving public policy of such
magnitude as to call for judicial intrusion." Id. at 959. Accordingly, the Comi of Appeals
22
affirmed the lower appellate court's determination that the arbitral award should be confirmed
despite "clearly imposing a penalty." See Associated Gen. Contractors, New York State Chapter,
Inc. v. Savin Bros., 45 A.D.2d 136, 144 (N.Y. App. Div. 1974). This case has been cited for the
same proposition by a court within this District. See AT&T Corp. v. Pub. Ser. Enterp. of Pa.,
Inc., 98-cv-6133 (LAP), 1999 WL 672543, at *5 (S.D.N.Y. Aug. 26, 1999) (citing Matter of
Associated Gen. Contractors, 36 N. Y.2d at 957) ("any public policy against enforcing a penalty
provision is insufficient to overcome the strong public policy in favor of arbitration."). See also
Crestwood Mech. Co. v. Main St. Lofis Yonkers, LLC, 927 N.Y.S.2d 815 (N.Y. Sup. Ct. 2011)
("Inasmuch as the Arbitrator had already determined that the award of an additional $82,000 did
not constitute an improper penalty, respondent is bound by that determination."). These cases
strongly reinforce the Court's conclusion that enforcement of the Partial Award does not
implicate the 'most basic notions of morality and justice.'
In sum, Petitioners have established little more than that they disagree with the decision
of the Panel. That is insufficient to meet their 'heavy burden' of demonstrating that summary
affirmance is not appropriate. See Telenor, 584 F.3d at 405. Accordingly, Respondent's CrossPetition is GRANTED and the Panel's Partial Award and Final Award are both confirmed.
V.
CONCLUSION
In conclusion, the Petitioners' petition to vacate is DENIED, while the Respondents'
cross-petition to confirm, recognize, and enforce the award is GRANTED. This resolves Dkt.
No. 23. The Clerk of Court is instructed to terminate the case.
SO ORDERED.
23
Dated:
~t
New
(,
2015
r , New York
24
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