Enforcing Annulled Awards: Can a U.S. Court Enforce an Arbitral Award Set Aside by a Foreign Court? The TermoRio Case

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is the bedrock of international arbitration, facilitating the enforcement of awards across borders in over 170 signatory states. However, the Convention also provides limited grounds upon which a national court may refuse to recognize or enforce an award. One of the most debated of these grounds, found in Article V(1)(e), allows a court to refuse enforcement if the award "has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made" (i.e., the arbitral seat). The permissive language "may be refused" has sparked considerable international discourse: does it grant the enforcement court discretion to enforce an award even if it has been annulled at its seat? The U.S. Court of Appeals for the D.C. Circuit's decision in TermoRio S.A. E.S.P. v. Electranta S.P. (487 F.3d 928 (D.C. Cir. May 25, 2007)) provides a significant U.S. appellate perspective on this complex and crucial question.

I. The Underlying Arbitration and its Annulment at the Seat in Colombia

The dispute originated from a 1997 Power Purchase Agreement (PPA) between TermoRio S.A. (a Colombian power generator) and Electranta S.P. (then a Colombian state-owned power purchaser). The PPA stipulated arbitration under the Rules of the International Chamber of Commerce (ICC), with the seat of arbitration in Barranquilla, Colombia.

Following Electranta's alleged default under the PPA (due to lack of funds after a privatization process restructured its assets), TermoRio initiated ICC arbitration in Colombia. On December 21, 2000, the arbitral tribunal issued an award in favor of TermoRio, ordering Electranta to pay approximately USD 60.3 million for breach of the PPA.

Shortly thereafter, on December 23, 2000, Electranta applied to the Colombian courts to set aside (annul) this award. The challenge eventually reached Colombia's highest administrative court, the Council of State. The Council of State annulled the arbitral award. Its primary reason was that, under Colombian law governing domestic arbitrations, disputes between Colombian entities concerning domestic matters (which this was deemed to be, despite the involvement of ICC Rules) had to be conducted exclusively under Colombian national arbitration rules and procedures. The Council of State found that the parties' agreement to arbitrate under ICC Rules was impermissible for such a dispute, effectively rendering the arbitration agreement or the procedure adopted thereunder invalid under mandatory Colombian arbitration law. Thus, the award was vacated at its seat on grounds rooted in Colombian domestic arbitration law.

II. The U.S. Enforcement Proceedings: A Quest to Revive an Annulled Award

Despite the annulment in Colombia, TermoRio sought to enforce the now-vacated award in the United States. On December 19, 2004, it filed a petition in the U.S. District Court for the District of Columbia, seeking recognition and enforcement under the New York Convention.

This set the stage for a direct confrontation with Article V(1)(e) of the Convention. The core legal issue was whether a U.S. court could, or should, enforce an international arbitral award that had been duly annulled by a competent court at the seat of arbitration. TermoRio argued that the permissive language of Article V(1)(e) ("recognition and enforcement... may be refused") granted the U.S. court discretion to enforce the award, particularly if the grounds for annulment in Colombia were purely domestic or would not be recognized as valid reasons for refusing enforcement under U.S. law or international norms.

The U.S. District Court for D.C., however, was unpersuaded and dismissed TermoRio's petition on March 17, 2006, refusing to enforce the annulled award. TermoRio appealed this decision to the D.C. Circuit.

III. The D.C. Circuit's Decision in TermoRio

On May 25, 2007, the U.S. Court of Appeals for the D.C. Circuit affirmed the District Court's dismissal, providing a significant pronouncement on the U.S. approach to enforcing awards annulled at the seat.

The D.C. Circuit's reasoning was grounded in a strong deference to the primary jurisdiction of the courts at the arbitral seat:

  1. Primacy of the Seat Court's Annulment: The court began by emphasizing the fundamental principle that an arbitral award is primarily a creature of the legal system of the seat of arbitration. If an award has been set aside by a court of competent jurisdiction at the seat, it is generally considered to have lost its legal force and effect; it becomes a "legal nullity" in the eyes of the law of its origin.
  2. Interpretation of "May" in Article V(1)(e): While acknowledging the word "may" in Article V(1)(e) suggests a degree of discretion, the D.C. Circuit interpreted this discretion very narrowly. It did not view it as a license for enforcement courts to routinely disregard annulment decisions from seat courts or to conduct a de novo review of the merits of that annulment. The court stated, "an arbitration award does not exist to be enforced in other contracting states if it has been lawfully ‘set aside’ by a competent authority in the state in which the award was made."
  3. Limited Public Policy Exception for Scrutinizing Foreign Annulments: The D.C. Circuit recognized that there might be exceptional circumstances where an enforcement court could disregard a foreign annulment. This would be if the annulment proceedings themselves at the seat were so fundamentally flawed as to violate the enforcing state's most basic notions of justice and public policy. Examples might include annulment procured through corruption or a complete denial of due process to the award-creditor in the foreign annulment court. However, the court stressed that this public policy exception is "construed very narrowly" and is not triggered merely because the enforcement court disagrees with the foreign court's application of its own domestic arbitration law, or because the grounds for annulment at the seat would not be grounds for refusing enforcement in the U.S.
  4. No Review of the Merits of the Colombian Annulment: In TermoRio, there was no allegation or evidence that the Colombian Council of State's annulment decision was procured by fraud, corruption, or a denial of due process. TermoRio's argument was essentially that the Colombian court had erred in its application of Colombian arbitration law by finding the ICC arbitration impermissible. The D.C. Circuit explicitly stated it would not "second-guess" the Colombian court's interpretation and application of Colombian law. The fact that Colombian arbitration law might have specific requirements for domestic disputes that differ from U.S. law or international commercial arbitration norms was not a basis for a U.S. court to ignore the Colombian annulment.
  5. International Comity and Respect for Seat Court Jurisdiction: The D.C. Circuit's approach reflects principles of international comity and respect for the primary supervisory role of the courts at the seat of arbitration. To routinely enforce awards annulled at the seat would undermine this primary jurisdiction and could lead to conflicting international legal obligations and chaos in the international arbitration system.

Thus, the D.C. Circuit concluded that, absent egregious and fundamental defects in the foreign annulment process itself that would violate basic U.S. public policy, U.S. courts should generally refuse to enforce an arbitral award that has been validly set aside by a competent court at the seat of arbitration.

IV. The International Debate: Diverging Approaches to Enforcing Annulled Awards

The D.C. Circuit's decision in TermoRio aligns with what is often described as the majority or "territorialist" view on the enforcement of annulled awards. This view emphasizes that an arbitral award is anchored in the legal system of its seat, and an annulment at the seat effectively extinguishes the award's legal existence.

However, this is not the universally accepted position. A notable counter-current exists, particularly in French jurisprudence:

  • The "Internationalist" or "Delocalized" View (e.g., France): French courts, in landmark cases like Hilmarton (1994) and Putrabali (2007), have taken the view that an international arbitral award is not necessarily dependent on the legal order of its seat for its existence or validity. Instead, it is an "international" legal instrument whose enforceability in France should be determined primarily by French law governing the recognition of international awards and by France's obligations under the New York Convention.
    French courts have relied on the permissive "may be refused" language in Article V(1)(e) and, significantly, on Article VII(1) of the New York Convention. Article VII(1) provides that the Convention shall not deprive any interested party of any right they may have to avail themselves of an arbitral award in the manner and to the extent allowed by the law or treaties of the country where such award is sought to be relied upon (the "more-favorable-right" provision). French courts have interpreted their domestic law as providing a more favorable regime for the recognition of international awards, one that does not necessarily require deference to an annulment at the seat if the award otherwise meets French criteria for recognition (which are themselves very pro-enforcement and limited to grounds similar to New York Convention Article V, but applied independently). Thus, an award annulled in Country X might still be enforceable in France if the French court finds no grounds under its own law (or its interpretation of Article V) to refuse enforcement.
  • U.S. Case Law – Earlier Nuances: Before TermoRio solidified the D.C. Circuit's deferential stance, U.S. case law had shown some variation:
    • Chromalloy Aeroservices v. Arab Republic of Egypt (D.D.C. 1996): In this widely discussed case, a different judge in the D.D.C. did enforce an award that had been annulled in Egypt. The court emphasized the discretionary nature of Article V(1)(e), strong U.S. pro-arbitration policy, and found that the Egyptian annulment was based on the arbitrators' alleged misapplication of Egyptian substantive law, a ground not recognized for refusing enforcement in the U.S. It also noted that the parties' contract had stipulated the award would be final and waived rights of appeal (which the Egyptian court action was characterized as).
    • Baker Marine Ltd. v. Chevron Ltd. (2nd Cir. 1999): The Second Circuit refused to enforce an award annulled in Nigeria. It distinguished Chromalloy, noting that Nigerian law permitted appeals on the merits (which had not been waived) and that the grounds for annulment in Nigeria (arbitrator exceeding powers, procedural impropriety) were akin to internationally recognized grounds for challenging awards. Baker Marine showed greater deference to the seat court's annulment.

The TermoRio decision, building on the trend seen in Baker Marine rather than Chromalloy, represents a stronger affirmation of the territorialist principle within U.S. federal appellate law, at least in the D.C. Circuit.

V. Navigating the Complexities: Practical Implications for U.S. Businesses

The international split on the enforceability of annulled awards, and the D.C. Circuit's position in TermoRio, have significant practical implications:

  1. The Paramount Importance of the Arbitral Seat: TermoRio dramatically underscores that the choice of the seat of arbitration is not a mere logistical detail. The courts of the chosen seat will have the primary, and in most jurisdictions, the final say on the award's validity under the lex arbitri. An annulment at a carefully chosen, arbitration-friendly seat with a modern arbitration law and a sophisticated judiciary is rare. Conversely, selecting a seat with an unpredictable or interventionist judiciary, or an outdated arbitration law, increases the risk of annulment on parochial or unexpected grounds. Such an annulment will, in most jurisdictions including the U.S. post-TermoRio, likely be fatal to enforcement efforts elsewhere.
  2. Vigorously Defend Against Annulment at the Seat: If an award is rendered in your favor, and the losing party initiates annulment proceedings at the seat, these proceedings must be defended with utmost vigor. Relying on the possibility of enforcing the award in a third country despite its annulment at the seat is a high-risk and generally exceptional strategy, likely to succeed only in limited jurisdictions like France.
  3. The Narrowness of the Public Policy "Escape Hatch" in the U.S.: If you are the party seeking to enforce an award in the U.S. that has been annulled elsewhere, the TermoRio framework means your primary, if not only, argument will be that the foreign annulment process itself was so fundamentally flawed (e.g., corrupt, lacking basic due process) that it violates fundamental U.S. public policy. Arguing that the foreign court simply "got its domestic law wrong" or applied principles different from U.S. law will generally not suffice.
  4. Drafting Arbitration Clauses: While the core issue in TermoRio was post-award, drafting can play a preventive role. Ensuring the arbitration agreement is clear, specifies internationally recognized rules (like ICC, LCIA, UNCITRAL), and is compliant with the mandatory laws of the chosen seat can minimize potential grounds for annulment in the first place. Parties might also consider including clauses waiving any rights to appeal or set aside the award to the fullest extent permissible under the law of the seat, though the effectiveness of such waivers against mandatory grounds for annulment (especially those involving public policy or fundamental procedural defects) is often debatable and varies by jurisdiction.

Conclusion

The D.C. Circuit's decision in TermoRio S.A. v. Electranta S.P. provides a clear statement of U.S. federal appellate law generally favoring deference to annulment decisions made by competent courts at the seat of arbitration. While Article V(1)(e) of the New York Convention uses permissive language ("may be refused"), TermoRio indicates that U.S. courts are likely to exercise this discretion by refusing enforcement of an award that has been duly vacated at its origin, unless the annulment proceeding itself was tainted by a violation of fundamental U.S. public policy concerning procedural fairness.

This approach emphasizes the territorial nature of international arbitral awards, linking their ultimate legal viability to the legal system of their seat. For international businesses, including U.S. companies, this reinforces the critical strategic importance of selecting an arbitral seat with a robust, modern, and arbitration-friendly legal framework, as the fate of their arbitral award may ultimately rest in the hands of that jurisdiction's courts. While the global debate on enforcing annulled awards continues, TermoRio provides a significant marker for the prevailing view in the United States.