Second Circuit Holds PDVSA Waived Ability to Argue Impossibility Defense based upon U.S. Sanctions  

On July 9, 2021, the United States Court of Appeals for the Second Circuit issued a summary order affirming the decision issued by the United States District Court for the Southern District of New York granting a partial final judgment against Venezuela’s state owned oil company, PDVSA Petroleo, S.A. (“PDVSA”), relating to its default on a $150 million Note issued by Plaintiff, Dresser-Rand Company (“Dresser-Rand”).

The Note Agreement which PDVSA failed to pay under specifically stated that payment was “absolutely, irrevocably, and unconditionally guaranteed,” and “the obligations of the Guarantor hereunder are unconditional and absolute and not subject to any reduction, limitation, impairment or termination for any reason.”  The Note Agreement further stated that the obligations of the Guarantor (PDVSA) were not subject to any “defense or setoff, counterclaim, recoupment or termination, whatsoever by reason of the invalidity, illegality or unenforceability of any of the guaranteed obligations.”  The Second Circuit reviewed the language contained in the Note Agreement in accordance with New York law which holds that a contractual guarantee stated by plain terms, in broad, sweeping and unequivocal language may foreclose any challenge to the enforceability and validity of the documents which establish a defendant’s liability for payments arising under an agreement as well as any other possible defenses.

PDVSA sought to argue in the Second Circuit that it could not have waived impossibility or illegality of performance as a defense because U.S. Sanctions prohibited PDVSA from making payments to Dresser-Rand absent a license granted by OFAC.  PDVSA further argued that the U.S. Sanctions blocking transactions between U.S. entities and PDVSA made it legally impossible for it to pay under the Note Agreement after it first defaulted on its payments in 2019.

The Second Circuit held that in view of the plain and broad language contained in the Note Agreement, PDVSA’s wavier of defenses in the Note Agreement, and the established enforceability of such provisions in New York, PDVSA had waived its impossibility defense.  The Second Circuit also held that by failing to timely raise the impossibility defense in the District Court, PDVSA forfeited its argument that its breach of the Note Agreement was excused for reasons of public policy and the potential illegality of making payments due to the U.S. sanctions in place at the time of default.

To read a copy of the Summary Order, please click here.

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