Northrop Grumman Ship Systems, Inc. v. The Ministry of Defense of the Republic of Venezuela, No. 20-60347 (5th Cir. Mar. 10, 2021) [click for opinion]

A little over a year before Hugo Chávez came to power in Venezuela, Huntington Ingalls Incorporated (“Huntington Ingalls,” formerly known both as Northrop Grumman Ship Systems, Inc. and as Ingalls Shipbuilding, Inc.), entered into a $315 million dollar contract with the Ministry of Defense of the Republic of Venezuela (the “Ministry”) to repair two Venezuelan Navy warships at Huntington Ingalls’s shipyard in Mississippi. The agreement contained a mandatory arbitration provision, designating Caracas, Venezuela as the exclusive arbitral forum. Years later, a substantial disagreement arose over cost overruns. The Ministry refused to pay for certain work, and Huntington Ingalls filed suit in the Southern District of Mississippi seeking damages and to compel arbitration.

The parties thereafter engaged in a series of protracted disputes over where the arbitration should be seated. Huntington Ingalls believed that the hostile political landscape in Venezuela, under Chávez’s leadership, made Venezuela an unreasonable venue for arbitration—particularly one involving a branch of the Venezuelan government. Huntington Ingalls submitted a number of expert declarations, including from a variety of American and Venezuelan lawyers and law professors, each testifying that the Venezuelan judiciary was subject to significant political pressure and other undue influence from Chávez, and was unwilling to enforce arbitral awards against government entities. The district court twice held (as did two different arbitral tribunals) that present conditions made it impracticable to arbitrate in Venezuela, in a way that was unforeseeable at the time the parties entered the contract and that essentially deprived Huntington Ingalls of its “day in court.”

The arbitration was ultimately transferred to and conducted in Rio De Janeiro, Brazil, ending in an award of over $128 million in favor of Huntington Ingalls. Huntington Ingalls moved the Southern District of Mississippi to enforce the award, which it did, rejecting the Ministry’s argument that the court had manifestly disregarded the parties’ agreement and the law in ordering arbitration outside of Venezuela.

On appeal, the Fifth Circuit considered whether Huntington Ingalls had sufficiently established the requisite elements to avoid enforcement of an arbitral forum selection clause on impracticability grounds, namely: (1) whether the conditions in the country made arbitration in Venezuela impracticable; (2) whether Huntington Ingalls could not have foreseen these conditions when it entered into the contract; and (3) whether the venue provision was severable from the remainder of the arbitration provision. As to the third point, the Fifth Circuit noted that severability had been already determined on an earlier appeal, and was thus “law of the case,” and would not be reconsidered here.

In determining the impracticability of an arbitration in Venezuela, the court considered whether such arbitration would be “so gravely difficult and inconvenient” that Huntington Ingalls would be “for all practicable purposes deprived of its day in court.” The court confirmed this element was met, citing the district court’s conclusions that such arbitration would likely have been affected by political influence and that Huntington Ingalls would likely have been unable to prevail against the Venezuelan government in any related court proceedings, regardless of their merits. Next, the court considered whether Huntington Ingalls had shown that it could not “reasonably have foreseen” the adverse conditions that created this impracticability at the time it entered its contract with the Ministry. Finding that Huntington Ingalls could not have reasonably foreseen these conditions, the court cited the declarations from law professors indicating that the Bolivarian Revolution—which rose to prominence after the contract was executed—was the spark that made the Venezuelan judiciary a significant obstacle to impartial arbitration.

For each of these reasons, the court ultimately held that the arbitral tribunal had not “manifestly disregarded the parties’ agreement or the law” in transferring the arbitration to Brazil, and affirmed the district court’s enforcement of the arbitration award.