Fifth Circuit Uses Alter Ego Theory to Confirm Arbitral Award

In 1993, an Argentine company, Bridas, entered in to a joint venture with the government of Turkmenistan, which was recently liberated from the Soviet Union. The venture went south when the government of Turkmenistan demanded a higher royalty percentage than provided by the Joint Venture Agreement. When Bridas refused to capitulate, Turkmenistan simply banned Bridas from the country.

A joint venture with a government of an unstable and new country in the former Soviet Union is a situation where arbitration really does make sense, and the JVA between Bridas and the Government of Turkmenistan did in fact contain an arbitration clause, which required disputes to be arbitrated in Houston. After being banned from the country, Bridas initiated arbitration. In response, Turkmenistan dissolved the governmental entity that actually entered into the JVA, and it abolished its Ministry of Oil and Gas. The government decreed that all proceeds from oil and gas exports in the country were to be directed to a special State Oil and Gas Development fund, and the fund’s assets were declared immune from seizure.

After the arbitration proceeding, which lasted several years, including twenty-one days of trial, the panel awarded Bridas an arbirtal award of $495 million. A federal district court in Houston upheld the award, but Turkmenistan appealed, arguing that the award could not be confirmed against an entity that did not exist at the time the JVA was signed. The Fifth Circuit remanded the case, instructing the district court to consider whether the alter ego theory allows confirmation of the award against the Turkmenistani entity that succeeded the entity dissolved by the government in the face of the arbitration.

The original Fifth Circuit opinion in this case is reported at 345 F.3d 347 (5th Cir. 2003), and it is a seminal opinion on Fifth Circuit law with respect to confirming arbitral awards (or opposing their confirmation) under the FAA. As an aside, it is also, as of at least a couple years ago, the only reported opinion that mentions the Texas International Arbitration Act.

At any rate, last Friday, April 21, the Fifth Circuit issued its second Bridas opinion. After remand, the district court reviewed the evidence, ruled that alter ego did not apply, and refused to confirm the award against Turkmenneft, the successor-entity. The Fifth Circuit has reversed that ruling (link is to .pdf), finding that alter ego does in fact apply in this case.

The opinion is more about alter ego law than it is about arbitration law, but the Bridas case is an important one in this area, so it seemed worth mentioning an additional chapter in the long story.

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