Court Affirms Decision Compelling Arbitration at Location Other than as Agreed to

In a case between Northrop Grumman and the Republic of Venezuela, the courts were faced with the issue of compelling arbitration in a venue other than the one the parties had agreed to. The Fifth Circuit affirmed the lower court’s decision to compel arbitration in a venue other than Venezuela.

As relevant to this discussion, the facts involved an agreement between the parties, entered into before Hugo Chavez came to power, that called for the arbitration of any disputes in Caracas, Venezuela. Some time later, in the face of a dispute and believing that it would not get a fair shake in Venezuela, Northrop Grumman sought to compel arbitration in another location. Finding arbitration in Venezuela to be impractical due to the political situation, the arbitration proceeded in Brazil. There, Northrop Grumman was awarded $128 million.

In granting Northrop Grumman’s motion to enforce that award, the court rejected Venezuela’s argument that venue was improperly changed. Its appeal followed.

In considering whether to disregard an arbitral-forum clause, “a party must demonstrate that enforcement is barred by a traditional contract defense impacting the substantive validity of the agreement — including, as relevant here, impracticability.” To do so, Northrop Grumman had to establish that “(1) conditions in the country made arbitration in Venezuela impracticable; and (2) that [Northrop Grumman] could not foresee those conditions when it entered into the contract.” Impracticability is satisfied where the party can demonstrate that it would be deprived its day in court if it were to proceed in that venue. Litigating in Venezuela against Venezuela would have deprived Northrop Grumman its day in court as no court there would rule against Venezuela, no matter the claim. As to Northrop Grumman’s inability to foresee this issue when it signed the agreement, the Court agreed with the lower court that Chavez’s election and his court stacking were not foreseeable even as Chavez was making waves in Venezuela when the contract was signed. As such, the Circuit Court affirmed.

Northrop Grumman Ship Sys. v Ministry of Defense of the Republic of Venez.