Natural Resources, Public Policy, and the New York Convention

Georgia (the country) recently argued in Enka Renewables LLC v. Georgia against the enforcement of an arbitral award that would purportedly violate U.S. public policy. Georgia relied on the U.S. public policy in favor of allowing other countries to control the natural resources within their own sovereign territories.  But does the United States have such a public policy?

In support of its argument, Georgia cited a 2018 federal case from the District of Columbia, Hardy Exploration & Production (India), Inc. v. Government of India, Ministry of Petroleum and Natural Gas. In Hardy, Judge Rudolph Contreras did indeed refuse to enforce an arbitral award because of “the United States’ public policy interest in respecting the right of other nations to control the extraction and processing of natural resources within their own sovereign territories.”  Unfortunately for Georgia, the Hardy court supported this conclusion in part with an unconvincing discussion of whether specific performance is available under the Foreign Sovereign Immunities Act (FSIA).

The Enka Case

The recent case against Georgia, Enka Renewables, LLC v. Georgia, involved the enforcement of an arbitral award arising out of a dispute over the development of a hydroelectric project in Georgia.  The project was repeatedly delayed by public protests and environmental concerns. Enka eventually terminated the agreement, claiming that Georgia had breached by failing to provide access to the site. After termination, Georgia was entitled to the project’s assets, but the two parties disagreed about what those assets were worth. The arbitral tribunal found for Enka and awarded damages.  In the action to enforce the award in the United States, Georgia argued the public policy exception applied because the case involved control over natural resources in its own territory.

The Hardy Case

The Government of India and Hardy Exploration and Production (India), Inc. (“HEPI”) entered into a contract that allowed HEPI to search for hydrocarbons off of India’s southeastern coast.  If HEPI found crude oil, the contract gave HEPI two years to ascertain if oil extraction was commercially viable. If HEPI found natural gas, it had five years to assess commercial viability.  After commencing a search, HEPI claimed it found natural gas. India argued that HEPI had instead discovered crude oil, and two years later it informed HEPI that its rights to the area (called the “Block”) had been terminated. HEPI initiated arbitration proceedings and won. The Tribunal ordered specific performance by India. In particular, India was ordered to allow HEPI back onto the Block for another three years so that HEPI could continue to assess whether the natural gas it had discovered was commercially viable. HEPI was also awarded interest on its original investment.  India did not comply. HEPI filed a petition for confirmation of the arbitral award pursuant to the Federal Arbitration Act and the New York Convention.

Public Policy Exception

India argued that the court should not confirm the arbitral award because doing so would violate U.S. public policy. The New York Convention (and U.S. law) has a public policy exception, but the burden of demonstrating that the exception applies is – as the court reasoned – a “heavy one.” In assessing whether public policy prohibited the award of injunctive relief, the court relied heavily on the FSIA.

It began by correctly noting that the FSIA does not explicitly address the award of specific performance. Instead, the statute provides for immunity from suit and in separate provisions, it also protects the property of foreign sovereigns from measures of execution. There are limited exceptions to both forms of immunity. In the light the FSIA’s silence on specific performance, the court reasoned that its task was to determine whether the injunction “would undercut American public policy, as expressed through the FSIA.”   The court went on to reason that because the FSIA does not specifically allow for injunctive relief, the statute expresses a policy preference that disfavors this remedy. In the court’s words, by “allowing for specific, domestic methods of ensuring that plaintiffs receive []damages” the statute demonstrates “the United States’ public policy commitment to respecting the sovereignty of foreign nations by only holding them liable for certain forms of relief.”

The court’s reasoning misunderstands the structure of the FSIA. The statute provides immunity to the property of a foreign sovereign that is located in the United States. That immunity protects the property from measures of enforcement and execution. The purpose is to protect property located in the United States, not to express a preference about remedies. Indeed, elsewhere the statute provides that the “foreign state shall be liable in the same manner and to the same extent as a private individual under like circumstances” but then excludes punitive damages (but not specific performance). The silence on injunctive relief suggests not that it is disfavored, but instead that the statute does not limit it.  As the Second Circuit has reasoned in a case involving injunctive relief against Argentina:

FSIA imposes no limits on the equitable powers of a district court that has obtained jurisdiction over a foreign sovereign, at least where the district court’s use of its equitable powers does not conflict with the separate execution immunities created by § 1609.

NML Cap., Ltd. v. Republic of Argentina.

There is also another confusing and erroneous line of reasoning in Hardy about immunity from execution. The court notes that the exceptions to execution immunity only apply to the foreign state’s property located in the United States, suggesting that the immunity conferred on the foreign sovereign’s property outside the United States is absolute. But the statute confers no immunity at all on the foreign sovereign’s property located outside the United States. It only confers immunity – and then creates some exceptions – for property located in the United States. Nor, for that matter, does the FSIA provide the tools or mechanisms of enforcement. Instead, it just provides immunity from whatever enforcement measures would otherwise be available (for money damages, those are generally governed by Federal Rule of Civil Procedure 69).

Nevertheless, I agree with the district court’s decision that it should not issue an injunction in this case. As the court points out, enforcing such an injunction would be very difficult, and it would interfere with a sovereign’s decisions about how to use its own territory and territorial sea, implicating core questions of sovereignty.  That is a tough result for HEPI, because the award of specific performance seems entirely reasonable – we cannot know whether the natural gas was commercially viable (and thus calculate damages) unless India complies with its contractual obligation to give HEPI access to the area so that it can evaluate viability.

Conclusion

To return to the Enka case, the court had little trouble distinguishing Hardy. It was correct to do so – Enka was not seeking access to the site – the dispute was just about damages. As the Second Circuit reasoned when it affirmed an injunction that permanently enjoined Argentina from making payments on some bonds without making comparable payments on other bonds: compliance with the injunction did not require the court to exercise “dominion over sovereign property.” Although I am not sure that “dominion” is exactly the right terminology, the distinction between the injunction in Hardy and the damages in Enka is convincing.  Both courts reached the right result, even if the contours of (and basis for) the public policy exception on sovereign control over territory remain unclear.