Ecopetrol S.A. and Korea National Oil Corporation v. Offshore Exploration and Production LLC, No. 14-cv-529 (S.D.N.Y. Sept. 10, 2014), the U.S. District Court for the Southern District of New York confirmed two interim arbitration awards requiring Respondent to pay millions of dollars in disputed liabilities pending the tribunal’s decision on ultimate liability, rejecting a challenge to recognition of the awards under Article V(1)(e) of the New York Convention.
The underlying dispute arose out of a Stock Purchase Agreement governing the sale of certain entities by Respondent, Offshore Exploration and Production LLC, to Petitioners, Ecopetrol S.A. and Korea National Oil Corporation. The Stock Purchase Agreement required that Respondent hold Petitioners harmless against various taxes assessed against the entities that Petitioners acquired, that Respondent pay any taxes that the acquired entities contest, and that the parties arbitrate disputes arising out of or related to the Stock Purchase Agreement. Subsequently, Petitioners sought indemnification from Respondent for over $75 million in tax liabilities assessed against an entity Petitioners acquired pursuant to the Stock Purchase Agreement. Respondent objected to the indemnification claims and the parties arbitrated the dispute under the rules of the International Centre for Dispute Resolution (“ICDR”).
During the arbitration proceedings, the tribunal issued two “interim” arbitration awards. The first interim award required Respondent to reimburse Petitioners the full amount of the indemnification claims. Respondent initially attempted to reimburse Petitioners with funds from an escrow account established to satisfy disputes between the parties. Petitioners objected and obtained a supplemental interim award prohibiting Respondent from satisfying the first interim award from the escrow account.
Petitioners sought to confirm the interim awards in the U.S. District Court for the Southern District of New York, and to have the awards entered as a judgment under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) and the Federal Arbitration Act (“FAA”), 9 U.S.C. § 207. Respondent objected to confirmation of both awards.
Respondent argued that the interim awards should not be confirmed, because Article V(1)(e) of the New York Convention allows the court to refuse recognition and enforcement of awards that have not yet become binding on the parties. Since the interim awards were not “final” awards, Respondent contended that they were not yet binding on the parties and thus should not be confirmed.
The district court agreed that it lacks authority to confirm arbitral awards that are not final. However, the court disagreed that the “interim” label is dispositive as to whether an arbitral award is final, and stated that the same standards for finality apply with equal weight to awards labeled “interim.” Under those standards, “an award is final if it resolves the rights and obligations of the parties definitively enough to preclude the need for further adjudication with respect to the issue submitted to arbitration,” even if the award does not dispose of all claims. The Second Circuit has held that an interim award meets this finality standard for purposes of confirmation if the award required specific action and did not serve as a basis for further decisions by the arbitrators.
Here, the district court found that the interim awards required specific action, namely that Respondent tender payment of over $75 million and that Respondent satisfy the interim award with funds other than the escrow account. The court further held that neither interim award would serve as a basis for further decisions by the arbitration panel, noting that the awards included specific statements that the decisions would not have any bearing on ultimate liability for the tax claims. This was further supported by the terms of the Stock Purchase Agreement, which required Respondent to bear the burden of initial payment of disputed taxes while treating the issue of ultimate liability separately, and which specifically provided that any provisional measures ordered by the tribunal could be deemed a final award on the subject matter of the measures. Therefore, the court reasoned that the parties had empowered the tribunal to grant provisional relief that would be deemed final and the tribunal issued the awards to satisfy its obligation under the terms of the Stock Purchase Agreement. Because the interim awards “required specific action, resolved the rights and obligations of the parties with respect to the interim period at issue, and did so without in any way affecting future decisions of the arbitral panel,” the district court held that they were final and confirmable awards. The district court also rejected Respondent’s argument that the supplemental interim award addressed issues not submitted to arbitration and thus should be vacated under Article V(1)(c), FAA § 10(a)(4), and for manifest disregard of the law.
A version of this post originally appeared in the March 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.