Foley Hoag Wins Second Circuit Appeal for Client UEG Araucária Ltda.

Ruling preserves construction defect claims against Bechtel

April 22, 2011

Foley Hoag today announced it has won a Second Circuit appeal for client UEG Araucária Ltda (UEGA), a gas turbine power plant operator in Brazil, preserving the clients’ claims against Bechtel for construction defects.

Prosecuting these claims already has helped UEGA avoid hundreds of millions of dollars in regulatory fines and adjustments from the Brazilian government. The Second Circuit’s decision now clears a path for UEGA to seek to recover its direct damages from Bechtel.

UEGA has sought $30 million in direct repair costs and other damages from Bechtel due to the failure of the plant’s steam turbine generator after only limited use. Bechtel engineered, procured, and constructed UEGA’s plant under a “turnkey” agreement.

The matter at hand involved disagreement over which entity would hear the dispute.

The parties’ original agreement provided that “any dispute” between them would be subject to mandatory and binding arbitration in the International Court of Arbitration of the International Chamber of Commerce (“ICC”). Accordingly, UEGA filed an ICC demand for arbitration relating to the plant failure in September 2008. Bechtel, however, responded by filing a petition in a New York state court to stay the arbitration pending judicial resolution of a statute of limitations defense.

Hearing an appeal of a US District Court ruling, the Second Circuit sided with UEGA in an opinion published on Tuesday, March 22, 2011. That decision sends the timeliness dispute to the ICC for arbitration.

The Second Circuit’s decision ensures that UEGA’s construction defect claims against Bechtel will be resolved by experienced construction arbitrators as contemplated in the parties’ contract. More broadly, this is the first Second Circuit decision addressing the scope of a mandatory arbitration clause in the context of ICC arbitration.

“While this is a very significant win for our client UEGA, the decision is also important because it makes it more difficult for parties to end-run ICC arbitrations in favor of a judicial forum,” said Foley Hoag partner Jeffrey S. Follett. “The Second Circuit’s arbitration jurisprudence is particularly important to international clients, who often choose New York law to govern their development projects, regardless of where those projects are located. Obviously, we are very happy with this outcome for our client UEGA.”

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