Bridas S.A.P.I.C. v. Government of Turkmenistan, et al.

In February 1993, Bridas, an Argentine corporation, entered into a joint venture agreement (JVA) with Turkmenneft, a production company wholly owned and formed by the Government of Turkmenistan (a former Soviet republic that enjoys Iran , Afghanistan , and Uzbekistan as geographic neighbors). The JVA was created for the purpose of conducting hydrocarbon operations in Southwestern Turkmenistan . The JVA also called for mandatory arbitration with the law governing interpretation of the agreement to be the law of England . In November 1995, Bridas claims the Government ordered Bridas to suspend further work on the JVA. In April 1996, Bridas initiated arbitration proceedings against the production company and the Government with the International Chamber of Commerce (ICC) Court of Arbitration. The Government argued it was not a proper party to the arbitration, but the ICC referred the matter to a three-arbitrator tribunal in Houston , Texas .

The Tribunal ultimately held, in three separate awards, that the Government was subject to the arbitration proceedings, that the production company and the Government had repudiated the JVA, and that Bridas was owed damages of $495,000,000.00 based on a 10.446% discount rate. Bridas then initiated this lawsuit in July 1999 in the Southern District of Texas to enforce the award. The production company and the Government moved to vacate or modify the arbitral awards. The District Court concluded that despite the Government’s non-signatory status, the principles of agency and equitable estoppel bound it to the JVA, and the Court, subsequently, denied the motions.

The Fifth Circuit noted that the “four corners” of the JVA did not bind the Government to arbitrate the dispute because the Government did not sign the JVA and it was not defined as a party to the agreement. The Fifth Circuit noted, however, that a non-signatory to an arbitration agreement can be bound to the agreement under 6 theories: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego (piercing the corporate veil), (5) estoppel, and (6) third-party beneficiary. The Court stated Bridas waived arguments under incorporation by reference and assumption.

The bulk of the Fifth Circuit’s lengthy opinion considers the agency theory. The Fifth Circuit observed that the production company is entitled to a presumption of independent status under the law. Bridas, therefore, carried the burden of establishing that the production company signed the JVA as an agent of the Government. The District Court relied on three pieces of evidence to establish agency: (1) a letter from the Deputy Chairman of the Council of Ministers of Turkmenistan to the Chairman of the production company that all the rights in the JVA are “fully and completely guaranteed by the government”; (2) Article 22.3 of the JVA indicates “interests, rights and obligations of Turkmenistan” are represented by the production company; and (3) a 1996 letter from the Government’s Ministry of Oil and Gas to the director general of another joint venture between Bridas and the production company that “the Ministry is [the production company].” The Fifth Circuit found these evidentiary articles were not enough. In examining each, the Fifth Circuit noted: (1) a guarantor cannot be compelled to arbitrate on the basis of an arbitration clause in a contract to which it is not a party; (2) a statement of representation, such as that in Article 22.3, in the midst of a provision regarding oral modifications of the agreement does not establish an agency relationship; and (3) while the 1996 letter is probative of the Government’s conception of itself in the other joint venture, it does not overcome the language of the JVA’s preamble ─ the production company is a legal entity within the meaning of the laws of Turkmenistan but it is not the Government or the Ministry. The Fifth Circuit added, “We are simply unable to conclude that the parties, one a multi-national corporation who has negotiated joint venture agreements in the past, and the other, a sovereign nation, both represented by able counsel, intended [the production company] to sign the JVA as an agent of the Government in the absence of clearer language to that effect.”

The Fifth Circuit next considered the alter ego theory. The Fifth Circuit noted the District Court had rather summarily dismissed this theory since Bridas did not offer evidence establishing an absence of corporate formalities nor an indication of intermingling of corporate finances and directorship. The Fifth Circuit held the District Court erred in premising its conclusion solely on these elements. The Fifth Circuit emphasized, “Alter ego determinations are highly fact-based, and require considering the totality of the circumstances in which the instrumentality functions.” The Fifth Circuit then spent a great deal of time providing guidance to the lower court in considering this issue on remand.

The Fifth Circuit then turned its attention to the estoppel theory. The District Court held the Government, a non-signatory, may be equitably estopped from asserting it is not bound by the arbitration agreement when the signatory raises allegations of substantially interdependent and concerted misconduct against both a non-signatory and one or more of the signatories to the contract. The District Court relied on Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000). The Fifth Circuit held the District Court misapplied Grigson. In Grigson, a signatory plaintiff was estopped from relying upon the defendant’s status as a non-signatory to prevent the defendant from compelling arbitration under the agreement. Thus, Grigson was distinguishable. Here, the Government, unlike the estopped party in Grigson, did not sign the JVA and never sued Bridas.

The Fifth Circuit then assessed the third-party beneficiary theory. Under this theory, the courts must consider the intentions of the parties at the time of execution of the contract as it is not enough that the Government benefited from the existence of the JVA. The Fifth Circuit concluded on this issue, “the JVA simply does not evince the requisite clear intent to benefit the Government, other than to the degree ordinarily expected when an instrumentality of a sovereign enters into a contract to develop the country’s natural resources. The JVA’s integration clause, moreover, specifies that the terms of the agreement apply only to the parties,” defined therein as the production company and Bridas.

The Fifth Circuit was also presented with the question of whether the District Court erred in upholding the Tribunal’s award of damages for breach of contract. The Fifth Circuit observed the law is well-settled that a court can vacate an arbitration award only when it has “manifest disregard of the law.” The production company argued that the arbitration panel erred by failing to apply a market-based discount rate, adjusted only by excluding consideration of internal political risk, in determining the present-value equivalent of the estimated future income lost as a result of the breach. The production company further argued that the Tribunal’s decision runs counter to English law, which limits recovery to actual damages. The Fifth Circuit noted the selection of a discount factor is a question of fact to determined by the trier of fact. The force of this language “endows the arbitrators with wide discretion.” The Fifth Circuit then observed the production company cited no English law compelling the use of a particular discount rate or establishing the methodology for calculating a discount rate. The court also noted, “Present value determinations are not an exact science; competent experts and competent arbitrators can adopt highly divergent opinions without being deemed incorrect as a matter of law.” The court concluded the production company could not establish the award had manifest disregard of the law.

Finally, the Fifth Circuit considered the production company’s argument that the Tribunal awarded punitive damages despite the JVA’s forbiddance of same and absence of a punitive damages award from the Tribunal. The district court had rejected the production company’s argument on this issue. The production company argued the Tribunal implicitly awarded punitive damages by setting the discount rate too low. The Fifth Circuit made short order of this argument and held, “there is simply no colorable argument that an award of punitive damages was embedded in the arbitrator’s determination of the discount rate, given our conclusion, supra, that the arbitrator did not manifestly disregard the law in setting the discount rate.” The Fifth Circuit affirmed the district court on its determination of this issue.