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Enforcement of specific performance awards against sovereign states
Enforcement of specific performance awards against sovereign states
12 July 2018
Series
Blogs
12 July 2018
A decision of the United States (the “US”) District Court for the District of Columbia (the “Court”) has brought issues around enforcing awards of specific performance into the spotlight. The Court refused to enforce a UNCITRAL award for specific performance obtained by Scottish oil and gas company, Hardy Exploration and Production (India) (“HEPI”), against the Government of India (“GoI”) as being contrary to public policy. This case is the latest in a long-running series of oil disputes involving the GoI, which has been involved in arbitrations relating to 22 out of its 310 production sharing contracts between 2001 and 2015.
This case has a long and complicated procedural and factual history. In 1997, HEPI entered into a contract with the GoI that would allow HEPI to search for and potentially extract hydrocarbons in a geographic block located off India’s south-eastern coast (the “Block”). Under this contract, if any crude oil or natural gas was discovered, the participants would have a period of two or five years respectively to determine the commercial feasibility of production. HEPI discovered a reserve of what it claimed to be natural gas in late 2006. However, the Ministry of Petroleum and Natural Gas of the GoI insisted that the discovery was crude oil instead and in due course informed HEPI that its rights to the Block were relinquished due to its failure to submit a declaration of commerciality in time.
Following the GoI’s refusal to change its position, HEPI initiated arbitration proceedings under the contract. The Tribunal ultimately found in favour of HEPI and ordered that the Block should be restored to HEPI for a further three years. It also awarded interest to HEPI, as well as certain costs.
Although the GoI complied with the costs portion of the award, there then followed a protracted series of hearings in the Indian courts regarding the specific performance and interest portions of the award. Due to these delays, HEPI filed a petition for enforcement of the award with the Court. India has opposed this petition and requested a stay of proceedings.
The GoI put forward two main arguments against enforcement of the arbitral award. First, it argued that enforcement would violate the US’s public policy interest in respecting the sovereignty of foreign nations, as it would divest India of possession and control of its own territorial waters and natural resources. Secondly, India argued that the interest portion of the award was both punitive and coercive, and therefore would also be contrary to US public policy.
In response, HEPI argued that India had overstated the potential affront to its sovereignty as well as the hesitancy of US courts to hold foreign governments accountable for their actions. In support of this proposition, HEPI highlighted that US courts had not only enforced arbitral awards for specific performance in other countries but had also granted specific performance against defendant sovereign nations outside the international arbitration context. Finally, HEPI argued that the interest award was not punitive but rather compensatory in nature due to the capital that HEPI had already invested in the Block.
Having first refused India’s request for a stay, the Court considered HEPI’s petition for enforcement of the award with reference to the New York Convention (the “Convention”) and the Federal Arbitration Act (“FAA”), the statute through which the Convention is enforced in the US.
While the Convention allows courts to decline to enforce arbitral awards on public policy grounds, the Court noted that this defence was available in extremely narrow circumstances. In fact, the FAA has been held to allow courts little discretion in refusing or deferring enforcement of foreign arbitral awards due to the strong public policy in favour of arbitral dispute resolution. The Court, however, ultimately agreed with India that confirmation of the award would amount to forced interference with India’s complete control over its territory and would therefore violate public policy to the extent necessary to overcome the policy preference for recognition and confirmation of arbitral awards. In coming to its conclusion, the Court considered that respect for the independence and dignity of other nations includes respect for their territorial integrity.
With regards to HEPI’s arguments, the Court observed that the US cases referred to by HEPI concerning the enforcement of arbitral awards for specific performance had involved private corporations rather than foreign nations. In addition, the Court was not convinced by the cases relied on by HEPI which involved specific performance remedies granted against sovereign nations. In the first case, Chabad v Russian Federation (915 F. Supp. 2d 148 (D.D.C. 2013)), the Court pointed out that the US government had taken the position that the Foreign Sovereign Immunities Act (“FSIA”), which shields foreign states from lawsuits in US courts, did not permit a court to compel compliance with specific performance orders regarding property held by a foreign sovereign within its own territory. With regards to the second case, NML Capital v Argentina (699 F. 3d 246 (2d. Cir. 2012)), the Court regarded the injunctions ordered against Argentina in that case as somewhat exceptional.
The Court also noted that although the FSIA allowed US courts jurisdiction to confirm foreign arbitration awards, there was no mention of specific performance or extraterritorial enforcement. This was a clear indication of the US policy to respect the sovereignty of foreign nations by holding them liable for only certain forms of relief, which did not include specific performance. Furthermore, the Court observed that confirming the award would raise the possibility that foreign courts might be encouraged to confirm arbitral awards against the US for acts taken within its own borders. According to the court, such a possibility would make no sense as a matter of US public policy as the US had not waived sovereign immunity in its own courts against specific performance in contract cases.
As such, the Court also declined to enforce the interest portion of the award, as it was inextricably linked with the specific performance aspect of the award. The effect of enforcement would be to impermissibly coerce India into complying with a specific performance order which the Court had decided it could not issue.
The case illustrates some of the difficulties that may be encountered if seeking orders of specific performance against states; albeit, in this case against the backdrop of public policy arguments at the enforcement stage. Parties seeking such an order will not only have to consider whether the relevant court or tribunal has the power to so act – it also shows how considerations of discretion and policy can come into play in this sphere (particularly if, as in this case, the order can be seen as a significant interference in the state’s sovereignty). Parties therefore need to give due consideration to the form of relief sought in such circumstances, and whether pursuing a monetary award may be an easier way of acquiring relief.
Akshay Sewlikar would like to thank Yuen Yuen Tan for her assistance in the preparation of this article.