Arbitrating Against a State-Owned Entity: Insights From a Mexican ICC Dispute

On December 22, 2022, an Arbitral Tribunal issued its award on a dispute between HidroCadereyta and Pemex involving a 2013 public procurement contract for the design and construction of a hydrogen power plant and a natural gas pipeline. The Tribunal ultimately declared the termination of the Contract and ordered Pemex to pay MXN 72,090,952.43 and USD 11,413,242.39 in damages. Following the Award, HidroCadereyta successfully sought clarification of two calculation issues regarding interest and dollar payment estimates.

The Tribunal's decision not only reaffirmed the enforceability of arbitration agreements in public works contracts involving state-owned entities but also set important boundaries on the use of budgetary constraints as a force majeure defense. The award underscores the evolving role of international arbitration in resolving disputes at the intersection of public law and commercial obligations.

Below, we address the key discussions arising from this dispute.

Factual Background

On 9 July 2013, Pemex Refinación (now Pemex Transformación Industrial) and HidroCadereyta entered into a Mixed Public Works Contract. The contract established obligations for engineering development, procurement of equipment and materials, construction, testing, training, pre-startup, startup, and performance testing for a new hydrogen generation plant, as well as the completion of a 12-inch diameter gas pipeline to transport high-pressure natural gas from a branch line to the refinery (the “Contract”).

On 22 March 2016, HidroCadereyta notified Pemex of certain breaches related to the project’s financial situation, arising from the “interruption of regular payments by Pemex.”

On 1 April 2016, following a budget reduction authorized by Pemex’s Board of Directors, the parties executed a Suspension Agreement, agreeing to suspend the project for a period of 120 calendar days. Additionally, on 6 April 2016, the parties executed a Detailed Record documenting the technical, administrative, legal, and economic status of the Contract.

From 29 July 2016 onward, Pemex extended the project suspension, citing insufficient budget to continue the work. After several payment demands, HidroCadereyta unilaterally notified Pemex the Contract’s termination on the grounds that the contractual period for Pemex to make required payments had lapsed.

On 30 January 2020, HidroCadereyta filed its request for arbitration against Pemex before the ICC.

The Tribunal’s Analysis

(i)            Admissibility Issues

The Arbitral Tribunal first addressed the Respondent’s admissibility objections, in which it argued that the Claimant was required to exhaust alternative dispute resolution procedures under two different contractual provisions before resorting to arbitration (Award, pp. 38-40). The Respondent argued that (i) considering the nature of the dispute —technical and administrative— a distinct dispute resolution mechanism had to be exhausted first and, in any case, (ii) conciliation had to have been exhausted (Award, p. 38).

The Tribunal concluded that the arbitration could proceed, finding that the parties were not required to exhaust the separate dispute resolution mechanisms before commencing arbitration.

Upon a comprehensive analysis of the Contract, the Tribunal observed that the parties had agreed to different dispute resolution mechanisms depending on the nature of the controversy. For technical or administrative disputes, the parties were required to submit written claims to the head of the Responsible Area with the involvement of an independent expert. The parties agreed that any other disputes would be resolved through arbitration according to the ICC Rules (Award, p. 40 and 41). The Tribunal concluded that the dispute between the parties did not exclusively involve issues of a “technical or administrative nature,” therefore it was subject to arbitration under the terms stipulated in the arbitration agreement.

Regarding the need to resort to conciliation beforehand, the language of the provision established its optional nature –literal wording includes the word “may”–. The Arbitral Tribunal observed that the Respondent acknowledged during the hearing the optional nature of the provision; accordingly, both parties appeared to agree during the proceedings that exhausting the conciliation procedure was not required. Therefore, the Tribunal concluded that such stage was optional, and thus it was not necessary to exhaust this mechanism prior to the start of the arbitration.

(ii)           Jurisdictional Objections

Respondent raised a jurisdictional objection, arguing that the Tribunal was not a “competent authority” to declare the rescission of the Contract, and that such jurisdiction instead belonged to federal judges.

The Tribunal found that the Contract allowed two termination types: administrative termination by Pemex if the Claimant met certain criteria, and contractual termination for breaches attributed to Pemex.

The Tribunal further concluded that rescission for causes attributable to Pemex was not limited to judicial authorities but could be decided by any “competent authority.” Thus, based on the plain language of the Contract, the parties clearly intended to arbitrate contract disputes, including rescission for Pemex's breaches.

(iii)          Suspension and Extensions

The Tribunal found that although HidroCadereyta agreed to the original suspension by signing the Suspension Agreement without reservation, the indefinite extensions directly contravened Clause 16 of the Contract, which specifies that suspensions bust be temporary (Award, p.51).

Despite this allegation, the Tribunal determined that it was unnecessary to rule on the legality of the suspension. Since a breach of payment obligations was confirmed, the Tribunal could declare the termination of the contract for non-payment under the relevant termination provision, as requested by the Claimant.

(iv)          Force Majeure

The Respondent argued that it was forced to suspend the works under the Contract and to extend such suspension due to force majeure events beyond its control, arising from a decision by Pemex’s Board of Directors that reduced its budget. The Tribunal addressed this defense by analyzing five questions:

• Was the budgetary insufficiency to comply with the Contract beyond Pemex’s control? Given the close relationship between Pemex’s Board of Directors and its operating subsidiaries, and the coordinated manner in which they operate, the Tribunal could not accept that the budget reduction ordered by the Board was an event “beyond Pemex’s control” or an “act of a third party.”
• Did the alleged force majeure occur without fault or negligence on Pemex’s part? The Tribunal found that Pemex was at fault for having represented in the Contract that it had sufficient budget to perform its obligations and then disavowing that representation.
• Was the alleged force majeure unforeseeable? The Tribunal noted that from a review of market behavior in the energy sector, a drop in the price of oil was not unforeseeable. It also noted that the record showed that, after the budget reduction, Respondent continued to allocate resources for payments to other contractors, demonstrating that the suspension was not necessitated by budgetary shortfalls. Resources could have been allocated to fulfill payment obligations to Claimant.
• Did the alleged force majeure event have the characteristic of being unavoidable? While the Tribunal lacked sufficient evidence on the record to determine whether the decrease in Pemex’s budget was unavoidable, it emphasized that, under the Contract, a force majeure event must satisfy all elements of the contractual definition. Accordingly, given the failure to satisfy the elements detailed above, the Tribunal held that the budgetary decision adopted by the Board of Directors did not constitute a force majeure event under the Contract.
• Did the alleged force majeure prevent Pemex from fulfilling its contractual obligations? The Tribunal noted that the Respondent had the authority to select the destination of its available funds, deciding to make payments to other contractors during the suspension period. Therefore, the Tribunal concluded that the alleged force majeure event did not prevent Pemex from timely fulfilling its payment obligations to the Claimant.

(v)           Effect of HidroCadereyta's Termination Notice

The Tribunal held that HidroCadereyta’s unilateral termination notice was invalid because the Contract required that termination be declared by the competent authority— namely, the Arbitral Tribunal.

(vi)          Breach of Payment Obligations

The Tribunal found that Pemex had breached several payment obligations. Consequently, it declared the termination of the Contract and ordered the Respondent to pay MXN 72,090,952.43 and USD 11,413,242.39 in damages.

Conclusions

This award provides relevant guidance on several issues commonly arising in disputes involving state-owned entities and public works contracts.

First, the Tribunal’s analysis of the jurisdictional objections reaffirms the principle that parties’ consent to arbitration in commercial contracts will generally be upheld, even when one party is a state entity and the underlying contract has public law elements. The distinction between administrative and contractual termination mechanisms allowed the Tribunal to assert jurisdiction over disputes arising from a public entity’s alleged breaches.

Second, the Tribunal’s rejection of the force majeure defense is noteworthy. The award underscores that budgetary decisions made by a parent entity or governing board of a state-owned enterprise will not be treated as external events beyond the enterprise’s control. This is particularly significant in contracts with state entities, where budgetary constraints are often invoked to justify non-performance.

Finally, the award confirms that contractual termination clauses requiring a declaration by a “competent authority” —which may include an arbitral tribunal if so designated in the dispute resolution provision— can be interpreted as requiring an arbitral determination rather than unilateral action, even when the terminating party has legitimate grounds for termination.