OJSC Ukrnafta v. Carpatsky Petroleum Corp. ( 2020 )

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 19-20011 April 6, 2020
Lyle W. Cayce
OJSC UKRNAFTA, Clerk
Plaintiff-Appellant
v.
CARPATSKY PETROLEUM CORPORATION,
Defendant-Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, SMITH, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
Arbitration is supposed to keep disputes out of court and “increase[] the
speed of dispute resolution.” See AT&T Mobility LLC v. Concepcion, 563 U.S.
333, 345 (2011). It does not always turn out that way. Despite the parties’
initial recourse to arbitration, this international oil-and-gas dispute has
reached the courts of three countries: Sweden, Ukraine, and the United States.
And this American chapter of the saga is still pending a decade after the
private tribunal awarded $147 million.
This appeal challenges an order confirming that award. The principal
issue is whether an allegedly undisclosed change in the place of incorporation
of one party from Texas to Delaware—and the continued use of a Texas
corporate seal by that party’s aptly named president, Mr. Texas—means there
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was never an agreement to arbitrate. We reject that defense as well as the
others asserted and affirm the confirmation order. We also conclude that the
arbitration precludes the claims the losing party still wants to pursue.
I.
This case has its origins more than a quarter century ago in the breakup
of the Soviet Union. Foreign investment, especially in energy, flooded into
former Soviet Republics. Carpatsky Petroleum Corporation, at the time a
Texas company, saw an opportunity in Ukraine. In 1994, it agreed to develop
petroleum with that country’s state oil-and-gas enterprise, OJSC Ukrnafta.
Ukrnafta is a portmanteau of Ukraine and the Ukrainian word for oil.
One year later, the parties add the “and-gas” to their dealings. They
signed a joint activity agreement (JAA) to develop a gas condensate field in
Ukraine. Ukrainian law would govern that agreement, and an international
commercial arbitration tribunal in Kiev would resolve any disputes.
In July 1996, Carpatsky merged into a newly incorporated Delaware
company of the same name. 1 According to the later testimony of Leslie Texas,
the president of both companies, “nothing changed” but the corporate
structure. He also testified that he told a Ukrnafta official about the change,
but Carpatsky did not formally notify Ukrnafta. Indeed, an October 1996
amendment to the JAA still states that Carpatsky was registered in Texas, and
Mr. Texas accompanied his signature with the Carpatsky-Texas seal. 2
1 This opinion uses the terms “Carpatsky-Texas” and “Carpatsky-Delaware” when
necessary to distinguish the two entities. But the corporations never had the state identifier
in their names.
2 This seal does not contain the word “Texas.” And Texas does not issue corporate
seals or require businesses to have them. See TEXAS SECRETARY OF STATE, Formation of
Texas Entities FAQs (“Where Can I Get a Corporate Seal, Stock Certificates, and a Minute
Book?”), https://www.sos.state.tx.us/corp/formationfaqs.shtml. But the seal includes an
identification number tied to the Texas incorporation, which is likely why the parties agree
this is a “Texas seal.”
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Two years later, Carpatsky and Ukrnafta again amended the JAA.
Among other things, this 1998 amendment changed the arbitration venue to
the neutral location of Stockholm. Mr. Texas again stamped the Carpatsky-
Texas seal next to his signature on the agreement.
About a decade after the parties’ relationship began, it started to go bad.
Over the years, Carpatsky had failed to contribute half of the venture’s capital.
To compensate, Ukrnafta increased its own contributions and, as a result, its
ownership interest. In 2004, however, Carpatsky wanted to “top up” its
investment. It asserted a contractual right to make up for missed
contributions and restore its 50% interest. Ukrnafta refused the request and
declared itself the “sole owner” of projects it undertook without Carpatsky’s
input.
Litigation followed. In 1997, Carpatsky filed an arbitration request in
Stockholm. It alleged that Ukrnafta breached the JAA by rejecting
Carpatsky’s request to restore its 50% interest, engaging in exploration and
development without Carpatsky, and withholding information. The request
identifies Carpatsky as a Delaware company. In its answer, Ukrnafta “agreed
to proceed with the arbitration.” When Carpatsky filed its statement of claim,
it again correctly described itself as a Delaware company. In its statement of
defense filed the next month, Ukrnafta did not challenge jurisdiction.
Ukrnafta changed course in December 2008, more than a year after the
arbitration began and more than six months after the Statement of Claim was
filed. For the first time, Ukrnafta disputed jurisdiction. It alleged it had just
discovered that Carpatsky had changed corporate entities and argued there
was no arbitration agreement with Carpatsky-Delaware.
To further pursue the change-of-domicile argument, Ukrnafta soon
opened the American front in this litigation. In early 2009, it sued Carpatsky
in Texas state court, alleging that every amendment after July 1996 was “null
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and void” because those amendments were signed by the defunct Texas
corporation. Ukrnafta asserted claims of negligent misrepresentation, fraud,
misappropriation of trade secrets, tortious interference with existing contracts,
and unjust enrichment. Carpatsky removed the case to federal court, asserting
that the suit related to an arbitration agreement falling under the Convention
on the Recognition and Enforcement of Foreign Arbitral Awards (the
Convention). 9 U.S.C. § 205, 21 U.S.T. 2517.
Ukrnafta sought to enjoin Carpatsky from using trade secrets that, in
Ukrnafta’s view, the Delaware entity never had a right to. Carpatsky sought
to stay the American litigation pending the arbitration. Despite Ukrnafta’s
claim that the amendment providing for arbitration in Sweden never came into
existence, the district court stayed the lawsuit and denied Ukrnafta’s motion.
After it failed to obtain injunctive relief, Ukrnafta filed a motion to remand to
state court. The court struck the remand motion because of the stay. Ukrnafta
never reurged it.
Back in Stockholm, the arbitral tribunal determined that it had
jurisdiction because Ukrnafta’s objection was “untimely” and Ukrnafta had
arbitrated “without reservation” despite having documents—like the
arbitration request—showing that Carpatsky was a Delaware company.
Around this time, Ukrnafta expanded the litigation to European courts.
It sued Carpatsky in Sweden and Ukraine. It took just two months for the
Ukrainian court to render its verdict: all agreements after Carpatsky-Texas
became Carpatsky-Delaware were “non-executed.” That meant there was
never an agreement to arbitrate in Stockholm. Ukraine’s appellate courts later
agreed.
The Ukrainian ruling did not deter the Swedish arbitration tribunal. In
September 2010, it awarded Carpatsky close to $147 million and declared the
JAA terminated based on Ukrnafta’s breach. In doing so, the tribunal held
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that Carpatsky-Delaware was a party to the JAA. Applying Delaware law, it
concluded that Carpatsky-Delaware succeeded Carpatsky-Texas’s rights, so it
“acquired the legal capacity to enter into the Restated JAA” and amendments.
Endowed with that authority, Mr. Texas signed the JAA and amendments.
That was enough to bind the company.
With its arbitration win in hand, Carpatsky tried to reopen the U.S.
litigation. It asked the federal court to lift the stay and confirm the award.
The district court denied the motion without prejudice, keeping the stay in
place pending the lawsuit Ukrnafta had filed in Sweden.
The Swedish courts ruled against Ukrnafta. The trial court held that
the arbitral tribunal had jurisdiction. The court of appeals affirmed. It later
rejected Ukrnafta’s appeal of the arbitration award.
At long last the European litigation had ended, so the district court
reopened this lawsuit in 2017. It confirmed the arbitration award, rejecting
numerous challenges Ukrnafta asserted. The district court also granted
summary judgment dismissing Ukrnafta’s state-law claims on preclusion
grounds. Ukrnafta appeals both rulings.
II.
We first address whether the district court had removal jurisdiction.
Ukrnafta contends it did not because the 1998 arbitration “agreement” never
existed, as it was signed by the defunct Carpatsky-Texas. As we will explain
later, we disagree with that premise. The 1998 amendment, which changed
the location of any arbitration to Sweden, was entered into by “Carpatsky
Petroleum Corporation, USA,” with no mention of its being a Texas entity.
But the jurisdictional inquiry does not require us to decide whether an
arbitration agreement will end up governing the lawsuit. Beiser v. Weyler, 284
F.3d 665, 671–72 (5th Cir. 2002). Removal is allowed whenever a defendant
asserts a “nonfrivolous connection” to an international arbitration agreement.
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Certain Underwriters at Lloyd’s v. Warrantech Corp., 461 F.3d 568, 575–76
(5th Cir. 2006). That low bar follows from the language of the removal statute.
Removal is allowed “[w]here the subject matter of an action or proceeding
pending in a State court relates to an arbitration agreement or award falling
under the Convention.” 9 U.S.C. § 205. “Relates to” is broad language. Beiser,
284 F.3d at 669. That is why we have described section 205 as “one of the
broadest removal provisions . . . in the statute books.” Acosta v. Master Maint.
& Constr., Inc., 452 F.3d 373, 377 (5th Cir. 2006). As long as there is a
conceivable connection to an arbitration agreement, “the district court will
have jurisdiction to decide the merits of that claim.” Beiser, 284 F.3d at 671–
72. Removal to federal court may thus be proper even when it turns out there
is no arbitration agreement. 3 See, e.g., Outokumpu Stainless USA, LLC v.
Converteam SAS, 902 F.3d 1316, 1322–27 (11th Cir. 2018) (holding removal
was proper under Beiser’s conceivability standard but then concluding the
parties had not signed the arbitration agreement as required by the
Convention), cert. granted sub nom GE Energy Power Conversion France SAS,
Corp. v. Outokumpu Stainless USA, LLC, 139 S. Ct. 2776 (2019). 4
Section 205’s separation of the jurisdictional and merits inquiries is no
anomaly. The same dichotomy exists for federal question jurisdiction. That
core Article III jurisdiction exists so long as the plaintiff alleges a nonfrivolous
3 Ukrnafta ignores this jurisdiction/merits distinction in citing cases that address the
difference between challenges to the existence and validity of arbitration agreements. See
Arnold v. HomeAway, Inc., 890 F.3d 546 (5th Cir. 2018); Will-Drill Res., Inc. v. Samson Res.
Co., 352 F.3d 211 (5th Cir. 2003). In fact, those cases show that even though issues of
formation and existence are governed by state law, federal courts still get to decide them
because of their effect on the federal issue of arbitration. See Arnold, 890 F.3d at 550 (“Where
the very existence of a contract containing the relevant arbitration agreement is called into
question, the federal courts have authority and responsibility to decide the matter.”
(quotations omitted)).
4 The question presented relates to the merits of the arbitration issue, not the federal
court’s section 205 jurisdiction. See Petition for Certiorari, Sup. Ct. No. 18-1048.
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federal claim; the plaintiff need not, and often will not, succeed on the federal
claim for a federal court to be able to decide it. Beiser, 284 F.3d at 670–71; see
also Arbaugh & Y&H Corp., 546 U.S. 500, 513 n.10 (2006) (explaining that
federal jurisdiction exists whenever a plaintiff alleges a federal cause of action
unless it is “wholly insubstantial and frivolous”). This rule reflects that
jurisdiction must be determined at the outset of a case and that expertise on
federal law is just as useful in weeding out claims as in recognizing them.
Carpatsky easily clears the low conceivability hurdle for jurisdiction.
Beiser, 284 F.3d at 669 (recognizing that section 205 removal is allowed in “just
about any suit in which a defendant contends that an arbitration clause falling
under the Convention provides a defense”). Carpatsky alleged a connection to
the 1998 arbitration clause that is far from being “completely absurd or
impossible.” Id. The removal notice alleges that Ukrnafta’s claims relate to
that agreement, which falls under the Convention. And it alleges that
Carpatsky-Delaware is a party to that agreement.
Regardless of whether the arbitration agreement ends up applying, it is
enough that the removal petition makes this nonfrivolous argument that it
does. It is certainly conceivable from the face of the 1998 agreement, which
names Carpatsky Petroleum Corporation USA as a signatory, that these
parties are bound by the arbitration agreement—so much so that Ukrnafta did
not see a problem with the Stockholm arbitration for more than a year. That
conceivable connection is all that is required to invoke the expertise of the
federal courts to decide these disputed questions relating to a federal treaty
(the Convention).
III.
Having established that the district court had jurisdiction to resolve this
lawsuit, we now review its merits rulings. The big one is its confirmation of
the $147 million arbitration award.
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We first discuss the ground rules for our review of arbitration awards.
The scope of federal court review depends on whether the United States has
primary or secondary jurisdiction over the award. A country “in which, or
under the [arbitration] law of which, [an] award was made” has primary
jurisdiction. CONVENTION art. V(1)(e); see also Karaha Bodas Co. v.
Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F.3d 357, 364
(5th Cir. 2003) (Karaha I). Any other signatory country has secondary
jurisdiction. A secondary jurisdiction assesses only whether it can
domestically enforce the award; it cannot “annul” the award. Karaha Bodas
Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d
274, 287–88 (5th Cir. 2004) (Karaha II). And a secondary jurisdiction can
refuse to enforce an award only on the grounds listed in Article V of the
Convention. Id. at 288.
This award was made in Sweden. It was also made under Swedish
arbitration law. Although it might seem like Ukraine would provide the law
governing the arbitration because the JAA’s choice-of-law provision designates
that country, that clause does not discuss procedural law. As a result, the
Ukraine choice-of-law provision does not overcome the “strong presumption
that designating the place of the arbitration also designates the law under
which the award is made.” Karaha II, 364 F.3d at 292; see also 3 GARY B.
BORN, INTERNATIONAL COMMERCIAL ARBITRATION § 26.05[C][1][e][i][1], at
3463–65 (2d ed. 2014) (noting that a “general choice-of-law clause in [the]
underlying contract” does not select the law governing the arbitration). So
Sweden has primary jurisdiction. Other countries, including Ukraine and the
United States, have secondary jurisdiction.
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As a secondary jurisdiction, we can deny enforcement only on a ground
listed in Article V. 5 And we construe the Article V defenses to enforcement
“narrowly[] ‘to encourage the recognition and enforcement of commercial
arbitration agreements in international contracts.’” Karaha II, 364 F.3d at 288
(quoting Imperial Ethiopian Gov’t v. Baruch-Foster Corp., 535 F.2d 334, 335
(5th Cir. 1976)).
A.
The first Article V ground for nonrecognition captures Ukrnafta’s
principal complaint. It allows a court to deny recognition when the parties to
the arbitration agreement were, “under the law applicable to them, under some
incapacity, or the said agreement is not valid under the law to which the
parties have subjected it or, failing any indication thereon, under the law of
the country where the award was made.” CONVENTION art. V(1)(a). Although
Ukrnafta classifies its argument based on Carpatsky’s change of domicile as
one of contract “existence” rather than “validity,” this is the place to consider
both of those defenses. Because Article V(1)(a) first discusses capacity, an
issue of existence, a leading international arbitration treatise concludes that
Article V.1(a) covers issues of both validity and existence. 3 BORN
§ 26.05[C][1][b], at 3452 (“Article V(1)(a) extends broadly to all issues
concerning the validity of ‘the agreement referred to in Article II,’ including
issues of capacity, existence, and validity.”); id. § 26.05[C][1][c][ii], at 3457–59
(classifying claims of “nonexistence of the underlying contract” as Article
V(1)(a) issues).
5 Ukrnafta’s Article II and IV challenges would not succeed even if we could consider
them. The JAA and its amendments, or at a minimum the pleadings in the arbitration,
satisfy Article II’s “agreement in writing” requirement. Article IV is also satisfied because
the district court had certified copies of the agreements; they were attached to Ukrnafta’s
motion for a preliminary injunction as well as Carpatsky’s first motion to confirm the
arbitration award.
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Indeed, Ukrnafta recognizes that its concern about the seal goes to
capacity. Boiled down, its contention is that Mr. Texas did not have the
authority—that is, the capacity—to bind Carpatsky-Delaware because he used
the Texas seal when signing the 1998 amendment. Capacity is determined by
the “law applicable to” the party, rather than the law “to which the parties
have subjected it” or the “law of the country where the award was made.”
CONVENTION art. V(1)(a). The “law applicable to the party” on a capacity
question is the law of its domicile. 1 BORN § 4.07[A], at 626–27. That makes
sense, as dispute resolution clauses in a contract do not have force unless the
parties had the capacity to contract in the first place. Edminster, Hinshaw,
Russ & Assocs., Inc. v. Downe Twp., -- F.3d --, 2020 WL 1291637, at *2 (March
19, 2020).
Under Delaware law, Mr. Texas had authority to enter into the 1998
Amendment. He was the President of Carpatsky-Delaware. The agreement
listed the party as “Carpatsky Petroleum Corporation, USA,” with nothing in
the contract stating it was the no-longer-existing Texas entity. That leaves the
seal. As the arbitration tribunal correctly ruled, the postmerger use of the
Texas seal was “irrelevant” under Delaware law; what mattered was that Mr.
Texas was an authorized officer of the corporation whose signature bound the
corporation. Ukrnafta’s formalistic view of seals was outdated even a century
ago. See Rabinovich v. Liberty Morrocco Co., 125 A. 346, 347 (Del. 1924)
(rejecting the argument that use of the “wrong” corporate seal meant there was
no contract in favor of the “modern rule” that a corporation can “adopt pro hac
vice . . . any other seal . . . as its own”); Peyton-Du Pont Sec. Co. v. Vesper Oil
& Gas Co., 131 A. 566, 567 (Del. Super Ct. 1925) (explaining that the “early
common law” rule that “a corporation could act and speak only by the corporate
seal . . . has been relaxed in this Country, if not abandoned” (citing 2 WILLIAM
FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 754)).
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Ukrnafta’s larger point is that it did not know Carpatsky had
reincorporated in Delaware when the parties agreed to the amendments. As
reflected in some of its state-law claims, Ukrnafta appears to view the alleged
nondisclosure of Carpatsky’s change in domicile as a misstatement that
fraudulently induced the amendments. Left unexplained is why a Ukrainian
company would care whether its American partner was incorporated in Texas
or Delaware.
In any event, and regardless whether this issue is one of contract
existence or validity, Ukrnafta waived this argument by submitting to the
jurisdiction of the Stockholm arbitration. Piggly Wiggly Operators’ Warehouse,
Inc. v. Piggly Wiggly Operators’ Warehouse Indep. Truck Drivers Union, Local
No. 1, 611 F.2d 580, 584 (5th Cir. 1980). A party cannot agree to arbitrate and
then later tell a court that the arbitrator lacked authority to decide the case.
Id.; 3 BORN § 26.05[C][1][h], at 3482 (noting that, even in the Article V(1)(a)
context, it “is well-settled that a party can waive its right to challenge an
arbitrator’s jurisdiction, including the right to raise jurisdictional challenges
in subsequent recognition proceedings”). This waiver rule prevents
inefficiency and the gamesmanship that would result if a party could wait to
see how the arbitration tribunal ruled before deciding whether to challenge its
jurisdiction.
Even more than amounting to waiver, agreeing to an arbitration demand
may constitute an independent agreement to arbitrate. Piggly Wiggly, 611
F.2d at 584. We have long recognized this principle for domestic labor
arbitration, see id., and it is no less applicable to international commercial
arbitration, see 1 BORN § 5.02[A][2][j], at 692 (noting that “written
submissions, not raising any objection to jurisdiction” are a “written agreement
to arbitrate”); UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL
ARBITRATION art. 7(5) (2006) (recognizing that an agreement in writing
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includes “an exchange of statements of claim and defence in which the
existence of an agreement is alleged by one party and not denied by the other”).
That waiver—and the creation of a new written agreement to arbitrate—
happened here. The cover of Carpatsky’s arbitration demand noted its
domicile as “Delaware, United States” and the request later described it as “a
company incorporated and organized under the laws of the State of Delaware,
U.S.A.” So while the parties vigorously dispute whether Carpatsky told
Ukrnafta of the change in the years before the arbitration, at a minimum
Ukrnafta knew when it received the arbitration demand. Yet Ukrnafta
consented to the arbitration in its answer and did not contest jurisdiction in its
statement of defense.
Ukrnafta finally challenged jurisdiction six months after filing its
statement of defense. But the tribunal decided that was too late, applying the
Stockholm Chamber of Commerce rule that “any objections concerning the
existence, validity or applicability of the arbitration agreement” must be raised
no later than the statement of defense. The Swedish courts agreed with this
waiver finding. We see no reason to override that procedural ruling of the court
with primary jurisdiction over this arbitration and would reach the same
conclusion even if we owed no deference.
Because Ukrnafta consented to the arbitration despite Carpatsky’s twice
identifying itself as a Delaware company, the Article V(1)(a) defense fails.
B.
So does Ukrnafta’s argument that American courts cannot enforce the
award because it was “unable to present [its] case.” CONVENTION art. V(1)(b).
This article ensures that a court will enforce an arbitration award only if the
arbitration afforded the parties the basic due process rights they would have
received in the jurisdiction where enforcement is sought. Karaha II, 364 F.3d
at 298–99. In the United States, those minimum procedural safeguards are
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“adequate notice, a hearing on the evidence, and an impartial decision.” Id. at
299. The more fulsome procedures of the Federal Rules of Civil Procedure are
not required. Id. And just as a district judge hearing a case under the Federal
Rules need not admit all relevant evidence—among other things, it may be
cumulative, unreliable, or unduly prejudicial—an arbitrator need not allow all
evidence. Id. at 300–01. Failure to admit evidence rises to a due process
violation only when it “prejudices [the parties’] rights” to a fair hearing. Id. at
301 (quoting Hoteles Condado Beach, La Concha & Convention Ctr. v. Union
de Tronquistas Local 901, 763 F.2d 34, 40 (1st Cir. 1985) (Wisdom, J., by
designation)). Examples that have led courts not to confirm domestic
arbitration awards include refusals to consider the testimony of an essential
witness, Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20–21 (2d Cir. 1997),
or the only testimony available to a party, Hoteles Condado Beach, 763 F.2d at
40.
Ukrnafta’s process complaints come nowhere close to due process
violations. The tribunal held multiple hearings. The parties submitted
witness statements, expert reports, and multiple rounds of briefing before and
after the hearing. The merits hearing lasted four days with fifteen witnesses.
That looks a lot like a full-blown federal trial. And in some ways the tribunal
was more forgiving than a federal judge might be. It imposed no page limit on
the posthearing briefs and allowed Ukrnafta to present some damages
evidence after the evidentiary hearing. All of this was more than enough to
allow Ukrnafta “to be heard ‘at a meaningful time and in a meaningful
manner.’” Karaha II, 364 F.3d at 299 (quoting Iran Aircraft Indus. v. Avco
Corp., 980 F.2d 141, 146 (2d Cir. 1992)).
As for Ukrnafta’s specific concerns, the tribunal’s ruling that the JAA’s
limitation of liability was unenforceable did not offend basic notions of due
process. This issue arose when an arbitrator asked a Ukrnafta expert whether
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the provision limiting damages to direct losses is enforceable under Ukrainian
law when there is an intentional breach of contract. See CIV. CODE OF UKR.
art. 614. The expert denied that Ukrainian law invalidated such provisions,
but the tribunal advised that “[t]his may be one of the points on which the
parties will certainly elaborate in the post-hearing briefs.” Carpatsky did so,
invoking the Ukrainian statute in its first round of posthearing briefing to
argue that it could recover lost profits despite the limitation of liability.
Ukrnafta responded in the second round of briefing, spending more than ten
paragraphs arguing that the statute did not apply and that, in any event, there
was no intentional breach.
The tribunal sided with Carpatsky and awarded lost profits, an outcome
that Ukrnafta says it could not have “legitimately expect[ed].” And because it
did not expect the tribunal to agree with an argument that Carpatsky did not
advance until post-hearing briefing, Ukrnafta contends it was deprived of the
opportunity to present evidence on the topic. But the developments that made
Ukrnafta unhappy—the tribunal’s raising of an issue; lax enforcement of
preservation rules; its own incorrect prediction about how the tribunal would
rule; and, at bottom, disagreement with a substantive ruling—are typical
frustrations of a losing litigant. Nor was the tribunal’s loose view of deadlines
one-sided. Although the record is usually closed at the end of a trial, the
tribunal allowed either party to submit a request if it “wishes now to file
further documents.” In fact, it allowed Ukrnafta to submit some evidence
relating to damages after the hearing. Nothing about the tribunal’s handling
of the limitation of liability issue deprived Ukrnafta of a fair hearing.
Ukrnafta’s next process complaint attacks another common feature of
litigation: the factfinder’s awarding damages in an amount different from what
either party proposed. First off, Ukrnafta’s premise is questionable. The
parties hotly disputed how to account for the risk that Ukraine would continue
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to heavily regulate the price of natural gas. Ukrnafta’s expert opined that the
existing regulations would continue, resulting in no lost profits because the
price was fixed at such a low level. But in recognition of the possible repeal of
the stringent price control—as Ukraine had told the IMF it was going to do—
the damages expert provided an alternative model. The tribunal appeared to
accept this alternative discount rate when accounting for the uncertainty of
future Ukrainian regulation. It did not adopt Carpatsky’s model, which called
for much higher damages. So while the award was not an amount either party
proposed, the critical discount rate came from Ukrnafta’s expert.
But the larger point is that a factfinder is not limited to the parties’
damages calculations. If that were the case, a great many trial verdicts would
not stand. Cf. Outboard Marine Corp. v. Babcock Indus., Inc., 106 F.3d 182,
186 (7th Cir. 1997) (explaining that requiring a jury to explain its own damages
calculation is contrary to the very idea of the jury system). It does not violate
due process for a factfinder to calculate its own damages. Whether that
damages ruling should stand on appeal is a merits question, not a process one.
The final reason why Ukrnafta says it was not allowed to “present its
case” is that the tribunal excluded evidence of a new Ukrainian gas price
regulation. As noted, however, the tribunal did allow Ukrnafta to supplement
the record after the hearing with evidence of new price regulation. It was only
around six months later—after the conclusion of all briefing and the tribunal’s
final evidentiary deadline, after which it would accept new submissions only
in “exceptional circumstances”—that the tribunal did not allow new evidence
about Ukraine’s Natural Gas Act. A proceeding must end at some point. It did
not violate due process for the tribunal to finally conclude that no more
evidence would be allowed, especially on an issue that had been extensively
litigated.
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Ukrnafta has not identified anything about the arbitration that was
fundamentally unfair.
C.
Keeping the focus on lost profits, Ukrnafta next argues that the federal
courts cannot enforce the award because it does not fall “within the terms of
the submission to arbitration, or it contains decisions on matters beyond the
scope of the submission to arbitration.” CONVENTION art. V(1)(c). In
Ukrnafta’s view, the award exceeded the terms of submission because it
disregarded the limitation of liability.
Contrary to Ukrnafta’s framing, this is a merits challenge to the
tribunal’s conclusion that Ukrainian law renders a limitation of liability
unenforceable in cases of intentional breach. Right or wrong, the tribunal’s
answer to that question of statutory interpretation is not a ground for
nonrecognition under Article V(1)(c). 3 BORN § 26.05[C][4][a], at 3542 (“Of
course, Article V(1)(c) also does not apply where there is a challenge to the
substantive decision of the arbitral tribunal on the merits of the parties’
dispute.”); id. § 26.05[C][4][e], at 3552 (“Challenges to awards under Article
V(1)(c) are sometimes, mistakenly, based on objections to the arbitrators’
substantive contract interpretations or legal conclusions.”); see also Karaha II,
364 F.3d at 288 (explaining that Article V does not allow nonrecognition based
solely on a “mistake of law or fact”). Ukrnafta is not the first party to
characterize disagreement over a contractual limit on damages as a beyond-
the-scope Article V(1)(c) problem. 3 BORN § 26.05[C][4][e], at 3553. But the
Article V(1)(c) defense is much narrower, typically covering challenges that the
arbitration resolved disputes beyond those the parties submitted. Id.
§ 26.05[C][4][a], at 3542. Given the limited role of this nonrecognition ground,
courts have “virtually always rejected” efforts to turn it into a vehicle for
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reconsidering an arbitral ruling on a limitation-of-liability provision. See id.
§ 26.05[C][4][e], at 3553. We likewise reject this attempt to do so.
D.
Ukrnafta’s next stop on its tour of the Article V nonrecognition factors is
the defense for when the “composition of the arbitral authority or the arbitral
procedure was not in accordance with the agreement of the parties.”
CONVENTION art. V(1)(d). This allows Ukrnafta to rehash its principal
argument that Carpatsky-Delaware was never a party to the amendments,
leaving only the original agreement to arbitrate in Ukraine. But, as previously
discussed, Ukrnafta waived its challenge to the Stockholm tribunal’s
jurisdiction. See Karaha II, 364 F.3d at 298 (party’s failure to object to
appointment of arbitrator waived Article V(1)(d) objection).
E.
Ukrnafta’s last Article V defense is that recognition of the award would
be “contrary to the public policy” of the enforcing country, here the United
States. CONVENTION art. V(2)(b). Because the idea behind international
arbitration is to provide a neutral forum rather than litigate in either party’s
home court, we again apply this nonrecognition ground narrowly. It allows
nonrecognition “only where enforcement would violate the forum state’s most
basic notions of morality and justice.” Asignacion v. Rickmers Genoa
Schiffahrtsgesellschaft mbH & Cie KG, 783 F.3d 1010, 1016 (5th Cir. 2015)
(quoting Karaha II, 364 F.3d at 306).
Ukrnafta argues that American enforcement would be contrary to our
interest in international comity. It contends that recognizing the award would
disrespect the Ukrainian courts’ holdings that the 1998 amendment was
invalid because of Carpatsky’s changed domicile. More than that, it argues it
would violate Ukrainian law to enforce a contract that country’s courts have
deemed illegal.
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To be sure, American courts account for comity concerns. See Karaha I,
335 F.3d at 371–74. Respect for foreign sovereigns may, for example, limit the
extraterritorial reach of U.S. law. Id. at 371. But recognizing enforcement in
this secondary jurisdiction does not apply U.S. law in another country. Nor
does it resolve whether the award would be enforced in Ukraine or satisfied
with assets located in Ukraine. It is not even a merits ruling; recognition
means only that none of the limited grounds for not recognizing the arbitration
award applies. And what would an American nonrecognition ruling say to the
Swedish court that confirmed the arbitration award? Given the conflicting
rulings of foreign courts, comity concerns are a wash. But even if comity
pointed in one direction, Ukrnafta cites no American (or foreign) case
recognizing a defense under the Convention’s “public policy” provision on the
ground that the home court of one of the parties had repudiated the award.
That absence of caselaw is not surprising because on the other side of
possible comity concerns is the strong policy favoring international arbitration.
See Newco, Ltd. v. Government of Belize, 650 F. App’x 14, 16 (D.C. Cir. 2016)
(rejecting “public policy” defense because the interest in “international comity”
did not “override” the policy favoring arbitration). That policy led us to reject
an Indonesian court’s annulment of an arbitration award made in Switzerland
under Swiss procedural law as a defense to recognition. Karaha II, 364 F.3d
at 309–10 (holding that “the Indonesian court’s annulment ruling is not a
defense to enforcement under the New York Convention”). Allowing the
annulment rulings of a party’s home jurisdiction to prevent enforcement of an
arbitration award would gut international arbitration and interfere with the
global commerce it promotes. As the Supreme Court recognized decades ago,
international arbitration “obviates the danger that a dispute . . . might be
submitted to a forum hostile to the interests of one of the parties.” Scherk v.
Alberto-Culver Co., 417 U.S. 506, 516 (1974). A business may be even more
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fearful of a home court advantage when its counterparty is, like Ukrnafta,
state owned.
Giving a party’s home court veto power over recognition actions in
American courts would thus undermine our “emphatic” policy favoring
arbitration, which “applies with special force in the field of international
commerce.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.
614, 631 (1985). Enforcing this award would further American policy, not
contravene it.
F.
Ukrnafta’s final recognition defense is that the tribunal “manifestly
disregarded” the Ukrainian statute of limitations. But the Convention allows
us to “refuse enforcement only on the grounds specified in Article V.” Karaha
II, 364 F.3d at 288. Manifest disregard is not listed in Article V. We have
rejected manifest disregard as a nonstatutory basis for vacating domestic
arbitration awards. See Citigroup Global Mkts. Inc. v. Bacon, 562 F.3d 349,
355 (5th Cir. 2009). There is no reason to add it as a ground of nonrecognition
for international arbitrations. 6 See Yusuf Ahmed Alghanim & Sons, W.L.L. v.
Toys “R” Us, Inc., 126 F.3d 15, 20–23 (2d Cir. 1997); M&C Corp. v. Erwin Behr
GmbH & Co., 87 F.3d 844, 851 (6th Cir. 1996) (both concluding that manifest
disregard is not an Article V basis for nonrecognition of an international
arbitration award). That is especially the case when the Article V focus on
jurisdiction and process reflects the inability of a secondary jurisdiction to
second guess the merits rulings of the arbitration tribunal that the parties
6 Nor does Karaha II treat manifest disregard as a freestanding defense. 364 F.3d at
290. It merely mentions the phrase in one sentence, while analyzing challenges to the
arbitral award under specific Article V defenses. See id. at 294–96, 298, 305. And Karaha II
predates Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the Supreme Court
decision that led us to reject manifest disregard as an FAA ground for vacatur. Citigroup
Global Mkts., 562 F.3d at 355.
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agreed should decide their dispute. Karaha II, 364 F.3d at 288 (“Absent
extraordinary circumstances, a confirming court is not to reconsider an
arbitrator’s findings.” (quotations omitted)). Ukrnafta’s manifest disregard
defense fails.
As Ukrnafta has not established any nonrecognition ground, we affirm
the district court’s confirmation of the award.
IV.
The remaining issue is whether Ukrnafta can still pursue the state-law
claims that started this lawsuit. The district court thought it could not because
of issue preclusion. We conclude that the sibling doctrine of claim preclusion
provides a more straightforward approach to the same result.
At the outset, we note that arbitral decisions may have preclusive effect
as long as the “proceeding afford[ed] basic elements of adjudicatory procedure.”
Grimes v. BNSF Ry. Co., 746 F.3d 184, 188 (5th Cir. 2014) (addressing issue
preclusion); see also NTCH-WA, Inc. v. ZTE Corp., 921 F.3d 1175, 1181–84 (9th
Cir. 2019) (applying claim preclusion to arbitral award); cf. Murchison Capital
Partners, L.P. v. Nuance Commc’ns, Inc., 625 F. App’x 617, 620–24 (5th Cir.
2015) (addressing claim preclusion but deciding the case on other grounds). If
the law were otherwise, arbitrations would not result in “conclusive resolution
of disputes” and would carry the risk of “inconsistent decisions.” Montana v.
United States, 440 U.S. 147, 153–54 (1979).
For many of the same reasons we cited in rejecting Ukrnafta’s due
process challenge to the arbitration award, this international arbitration easily
satisfies the basic requirements of procedural fairness that allow it to have
preclusive effect. Ukrnafta was represented by counsel, submitted evidence
and argument in multiple rounds of briefing, and examined witnesses in a four-
day hearing. See Grimes, 746 F.3d at 188 (citing Greenblatt v. Drexel Burnham
Lambert, Inc., 763 F.2d 1352, 1360–61 (11th Cir. 1985)) (mentioning these as
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relevant inquiries). There is no suggestion that the arbitral tribunal, selected
via the common procedure of each side’s naming an arbitrator and those
arbitrators’ then agreeing on a third, was biased. Even the Ukrnafta-selected
arbitrator agreed with the result. The tribunal, operating under the respected
Arbitration Institute of the Stockholm Chamber of Commerce, provided fair
and full process.
We thus can give the arbitral ruling the same preclusive effect we would
give a judicial ruling. Claim preclusion applies when: (1) the parties are the
same; (2) a court with jurisdiction rendered the prior judgment; (3) the prior
judgment was final and on the merits; and (4) both actions involve the “same
claim or cause of action.” ASARCO, L.L.C. v. Mont. Res. Inc., 858 F.3d 949,
956 (5th Cir. 2017) (citation omitted). Importantly, res judicata also attaches
to claims that could have been brought in the earlier proceeding. Id. at 955.
Ukrnafta mainly challenges the “same claim” requirement. 7 We apply a
transactional test that looks at whether the claims in the second suit “arise[]
from the same nucleus of operative facts as the prior claims.” Id. at 956. We
consider “whether the facts are related in time, space, origin, or motivation;
whether they form a convenient trial unit; and whether their treatment as a
unit conforms to the parties’ expectations . . . .” Oreck Direct LLC v. Dyson
Inc., 560 F.3d 398, 402 (5th Cir. 2009) (quotations and alterations omitted).
Ukrnafta contends that its tort claims are not derived from the same
nucleus of facts as the arbitrated contract claims, which stemmed from its
barring Carpatsky’s participation in the venture. But that view is too narrow.
Both the arbitration and this suit revolve around the JAA, the amendments,
the parties’ activity under those contracts, and the effect, if any, of Carpatsky’s
change of domicile. Indeed, that latter issue of Carpatsky’s “covering up” its
7Ukrnafta also asserts that the tribunal lacked jurisdiction, but we have already held
that Ukrnafta consented to the arbitration.
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merger underlies Ukrnafta’s tort claims. Its view that Carpatsky-Delaware
never became its business partner is why it believes that entity stole trade
secrets, engaged in fraud, unjustly enriched itself, etc.
Ukrnafta cannot dispute that the arbitration focused on these events.
Instead, it responds that it asserted Carpatsky’s change of domicile as a
defense, rather than as an affirmative claim. But this is where the corollary
we mentioned kicks in: preclusion attaches to claims parties could have
asserted, not just ones they did assert. ASARCO, 858 F.3d at 955. The
arbitration involved the same transactions—the JAA, its amendments, and
Carpatsky’s change of domicile—that Ukrnafta’s state claims turn on. It could
have pursued those claims in arbitration, so it is precluded from asserting
them now.
* * *
The judgment is AFFIRMED.
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