Northrop Grumman v. Venezuela: Further Diversifying the Doctrine of Impracticability

Updated: Aug 29

Shubham Gandhi[1]


The arbitration agreement is principally governed by the terms as mutually agreed by the parties before entering into agreement, highlighting the principle of “Party autonomy”. The court usually is not allowed to alter or change the terms as agreed by the parties in the agreement. However, in a recent case of Northrop Grumman Ship Systems Inc. v. The Ministry of Defense of the Republic of Venezuela, the United States Court of Appeal had to decide whether one party to the arbitration agreement could request to relocate the seat of arbitration against the wishes of another. The doctrine of Impracticability stated that, if the court is of the view that the arbitration proceedings could not be carried out or it became impracticable to carry out at an agreed place, then the court has the power to change the seat of arbitration.


The court stamped out two important questions in order to serve justice to the parties: (i) whether it became impracticable to conduct arbitration proceedings on the seat so agreed (ii) whether the alleged instance of impracticability can be reasonably foreseen by the parties before the agreement.


The author in this post will analyse the judgment rendered by the court and application of the doctrine of Impracticability, analyse the aborning position of the international law regarding this rule and finally argue for the adoption of “interest of justice” in the advance to the doctrine.


The Agreement: Brief Facts


Huntington Ingalls, also known as Northrop Grumman Ship Systems Inc., (“Claimant”) a shipbuilding entity, entered into a $315 million contract with the Ministry of Venezuelan (“Ministry”), to repair two Navy frigates—ARV Mariscal Sucre and ARV Almirante Brion. The parties entered into a mandatory arbitration agreement, which stated that “Arbitration actions shall take place in Caracas, Venezuela.”


However, in the year 2002, there were disagreements between both the parties regarding the cost overruns, which lead to the claimant filing a suit claiming injunctive relief, damages and enforcement of the arbitration clause before the Southern District of Mississippi. The claimant requested the district court to order arbitration in Mississippi instead of Caracas, which was initially agreed in the agreement. The request was then supported by the declaration indicating that arbitration would be impracticable in Caracas, considering the pressure on Venezuela courts exerted by the then 1999 Venezuelan government in wake of the “Bolivarian Revolution” caused by Hugo Chavez.


The claim was further strengthened by a statement made by Manuel Gomez, a Venezuelan lawyer and law professor, stating that the Venezuelan government exerted various forms of undue influence on the Venezuelan judiciary, which led to Venezuelan Judiciary subject to immense political pressure and thereby lacking independence. He further asserted that this political pressure resulted in direct influence of government over the arbitration matters being conducted in the State.


After a series of arguments over the relocation, the Tribunal concluded that the legal seat of the arbitration should be changed to Rio de Janeiro, Brazil, in order “to safeguard the neutrality and integrity of the arbitration proceedings”. The tribunal awarded $128 million in favour of the claimant. When the claimant filed an application to enforce the arbitral award, the Ministry opposed the award on the ground of manifest arbitrariness evident from changing the seat of arbitration than otherwise agreed. Thus, the appeal was considered.


The Court of Appeal Judgment


While adjudicating on whether change of seat of arbitration was justified on the ground of doctrine of impracticality, the court considered the two following contentions.


Condition in the country made the arbitration Impracticable


The court while adjudicating the extent of the word “impracticable” relied on the precedent of McDonnell Douglas Corp. v. Islamic Republic of Iran, wherein it was held that the arbitration would be impracticable if arbitration would be so gravely difficult and inconvenient that the party would be for all practical purposes deprived of its day in court, leading to violation of natural justice principle i.e. “audi alteram partem”. Thereby in such circumstances, the court of law is justifiable to consider the request for change in a seat of arbitration accordingly.


The court in the present case, followed the reasoning laid down in McDonnell judgment, and held that, due to the revolution, the Venezuela government is exercising undue influence on the judiciary and this restrains the court from functioning in a just manner, making the judicial function impracticable.

Thereafter the court in the present case held that “performance may be impracticable because of unreasonable difficulty, expense, injury, or loss to one of the parties involved.” The court further relied on Menendez Rodriguez v. Pan Am. Life Ins. Co., wherein it was held that, Cuban refugees could not access justice after the revolution which made the judiciary a body in control of the government.


The court in the present case considered the situation similar to one discussed and relied on the statement made by Manuel Gomez, stating that the arbitration in revolution time is not possible.


Parties reasonably cannot foresee such situation (Unforeseability)


Unforeseability, in the words of the court, denotes that “the affected party must have had no reason to know at the time the contract was made of the facts on which he later relies”. Since no counter assertion was made by the Ministry, the court, relied on the statement of Mr. Gomez who stated that the deterioration of independence of the Judiciary came in the aftermath of the Bolivian Revolution which saw over 100 judges being summarily sacked and replaced within fortnight, and accepted the submissions of the claimant. The court ultimately concluded that the changes made thereafter were not reasonably foreseen by the claimant.


International viewpoint on change of seat of arbitration


The rules regarding the doctrine of Impracticability was subject to debate in 64th Session of the Institute de Droit International, wherein the proposal made by renowned Prof. Arthur von Mehren that, “if a State renders it unduly difficult to carry on an arbitration on its territory, the arbitration tribunal is entitled to remove the arbitration to such place as it may decide”, was accepted with a majority. In light of it, Article 3(d) came into force, which substantially laid down the rule regarding change in the seat of arbitration. The article stated: “Should it become unduly difficult to carry on an arbitration at the agreed place, the tribunal is entitled, after consultation with the parties, to remove the arbitration at such place as it may decide.”


The striking question raised by Von Mehren in the session was about the body who had the final authority to decide the matter. In order to answer the point, Prof. Pierre Lalive, in his work, very vehemently submitted that no one has the authority to change the seat of arbitration. As per his understanding the arbitration tribunal should be equipped with the power to decide the change in seat of arbitration. However, it is also noted that no arbitration institution contains rules regarding the change of the seat of arbitration which does not lead to the conclusion that no one has the authority to change the seat of arbitration, rather, in the present case, the US court changed the seat of arbitration by applying the doctrine of Impracticability.


Arguing for “Interest of Justice” Principle


In addition to the elements of Impracticality laid down in Northrop Grumman v. Venezuela, the author would like to submit that there should be one more criterion in deciding the request of change in the seat of arbitration. The author believes that the principle of “in the interest of justice” should also be added to the doctrine of Impracticability which shall be construed ‘narrowly’ while doing absolute justice. In Ali Shipping Corp v Shipyard Trogir, the English court preferred the “interests of justice” principle as it is narrower as compared to the “public interest” exception.


The party to the agreement must bring forth the cogent argument in order to prove that conducting the proceedings at the venue will be against the principle of justice and that it should be rectified by the courts. There may be instances like natural calamity, practical impossibility, the government has substantial influence or the courts are already biased towards the government, as observed in the present case, where the arbitration proceedings cannot take place and if they does, it shall be against the interest of justice.


Concluding Remark


The court in the present case has moved away from the traditional perspective, giving a new interpretation to the doctrine of Impracticality. The court stated that impracticality not only signifies impossibility of performance, but also interpreted the impossibility of performance of judicial function in an impartial way as a constituent of doctrine of Impracticability. While applying the doctrine they relied largely on the submissions made by lawyers and academicians from Venezuela.


The seat or place is a part and parcel of an arbitration agreement (pacta sunt servanda) and should be respected. But an arbitration agreement is always subject to the general principle of contract law and therefore the rule of rebus sic stantibus; changed circumstances must be duly considered and be implemented to further the cause of justice. That being said, a new ground of “in interest of justice” should find its place in the existing doctrine.

[1] Student of Dharmashastra National Law University, Jabalpur.


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