S.D. of Texas Confirms Foreign Arbitration Award Where Fraud Was Alleged

The Southern District of Texas has confirmed a foreign arbitration award despite that fraud was alleged because the public policy defense specified in the New York Convention does not preclude confirmation of a foreign arbitral award where the party arguing against confirmation also allegedly participated in the fraud.

In Tamimi Global Co. v. Kellogg Brown & Root LLC, No. H-11-0585, (S.D. Tex., March 24, 2011), the United States of America awarded Kellogg Brown and Root (“KBR”) a contract to provide dining facility services during military operations in Iraq. In June 2003, KBR entered into a Master Agreement sub-contract with Tamimi to provide food services at Camp Anaconda. The Master Agreement contained an arbitration clause which stated the London Court of International Arbitration (“LCIA”) would resolve any disputes which arose out of the Master Agreement.

After KBR entered into the Master Agreement with Tamimi, a disagreement arose between the US and KBR. The US began withholding monetary payments as a result of this dispute. KBR then withheld payment of approximately $35 million from Tamimi, arguing KBR was not required to pay Tamimi until it received payment from the US. In May 2010, KBR and Tamimi began an arbitration proceeding before the LCIA and a final award in favor of Tamimi was issued in December 2010. The award required that KBR pay Tamimi the $35 million Tamimi was owed under the Master Agreement plus 4% interest and well as legal fees plus 4% interest.

Tamimi filed a Petition to Confirm Foreign Arbitration Award and KBR filed a response opposing the petition and a Motion to Stay Proceedings pending resolution of the underlying dispute between KBR and the US which was then being litigated in the United States Court of Claims.

In support of its position, KBR alleged it was against public policy under the New York Convention to confirm an arbitration award when the underlying agreement which contained the arbitration agreement was obtained through fraud. KBR relied completely on a filing from the company’s ongoing dispute with the US which alleged KBR’s head of food services in Iraq and Kuwait, along with his deputy, received kickbacks from Tamimi in return for influencing KBR’s decision to award the sub-contract to Tamimi. The US further alleged that senior personnel at KBR, including the head of procurement and the head of dining services contracts, were made aware of irregularities related to the Master Agreement, but took no action.

Because KBR’s argument that the Master Agreement was obtained through fraud rested entirely upon allegations made by the US in the Court of Claims proceeding, and KBR was an alleged participant in the fraud, the Southern District held,

Enforcement of an arbitration award or other judgment in favor of one party alleged to have committed fraud against the other party allegedly engaged in the same fraudulent misconduct does not violate the most basic notions of morality and justice.

Next, the Southern District of Texas addressed KBR’s allegations that the LCIA’s award of interest was against Texas public policy. According to the court, the agreement provided for interest and arbitration awards must normally be enforced as written. KBR’s reliance on a case which refused to impose interest in an arbitration award was misplaced because in that case the arbitral award did provide for interest. Instead, a party sought to have the court add interest when it confirmed the arbitration award.

According to the Southern District of Texas,

In the case before this Court, the arbitration panel awarded interest, indeed, interest that was provided for by the governing arbitral rules, and it would be inappropriate to modify the Arbitration Award to eliminate the interest portion of the Award.

The court stated,

None of the seven grounds specified in the New York Convention, more particularly, the public policy defense, precludes confirmation of the Arbitration Award in this case. Public policy favors confirmation of foreign arbitration awards. The allegations of fraud by both KBR and Tamimi, even if proven by the United States in the Court of Claims proceeding, do not support denial of confirmation of the Arbitration Award on public policy grounds.

Tamimi’s Petition to Confirm Foreign Arbitration Award was granted and KBR’s Motion to Stay was denied.

Disputing would like to thank Charles Rumbaugh for alerting us to this case.

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