Revenge of the Jilted Groom
Global Dispute of the Year, Commercial Arbitration: Dow v. Kuwait Petroleum
Honorees: Dow Chemical Company; Shearman & Sterling
It was like a scene from a deal lawyer's nightmare, or a litigator's sick fantasy.
Two thousand closing documents lay in toast racks on the pale walnut tables of three cavernous boardrooms at Shearman & Sterling. The only signs of life were from the birds on the wall, anodyne prints from the nineteenth-century Audubon engraver Robert Havell. Ordinarily the rooms could hold 240 lawyers, roughly the number who had labored for 12 months with the aim of creating K-Dow Petrochemicals. K-Dow, a proposed collaboration between Kuwait Petroleum and Dow Chemical, would have been the world's largest maker of basic plastic, the stuff used to make the water bottles and the wrap on the cookie trays that usually line the narrow side tables in the conference rooms—except that even the side tables were covered from tip to tip with untouched closing documents.
On January 2, 2009, the CEO and general counsel of The Dow Chemical Company nervously loitered with Shearman's George Casey outside the closing rooms, and gazed at the law firm's wall of fame, lined with mementoes of deals stretching back to the 1897 merger that laid the foundation of Citibank. The CEOs of the state-owned Kuwait Petroleum Company and its subsidiary were nowhere in sight.
Like Ben in the movie The Graduate, Kuwait had decided that plastics were not in its future. Like Elaine in The Graduate, Kuwait had left the groom at the altar.
Kuwait had signaled the week before that it had cold feet, but Dow wasn't certain that KPC would have the nerve not to follow through. The two companies had spent a year negotiating 150 complex contracts to carve out Dow's polyethylene business line across 30 nations, and they had signed the joint venture agreement only five weeks earlier. How could Kuwait not show up?
"It was clear to us that the conditions for closing were satisfied," says Shearman's Casey. "We needed to make sure we were there for closing, and we were." Dow GC Chuck Kalil angrily directed his lawyers to take photos of the empty closing rooms. Not to hang on Shearman's wall of fame—but to prove breach of contract.
For this was not just any busted deal. Dow was planning to pour Kuwait's $7.5 billion cash straight into its purchase of the chemical maker Rohm & Haas. Suddenly it had no cash, and its borrowing costs shot up from under 2 percent to over 8 percent. Dow cut its dividend for the first time in its 111-year history. Moody's slashed its credit rating to a notch above junk. Faced with the prospect of a second failure in its bid for Rohm & Haas, Dow's stock price fell by two-thirds over the next two months.
Luckily for Dow, there was an arbitration agreement hidden in those toast racks, and 20 Shearman arbitration lawyers were raring to go. It's not that Dow hired a deal firm with a dispute in mind. "I wanted the best transactional firm for the deal, and the best arbitration firm for the dispute," Kalil says. "It so happened that Shearman was both." At the same time, Dow saw an advantage in using the same firm to do the deal, coordinate the dispute, and argue the dispute. (While Kuwait used Ashurst throughout, it hired the legendary barrister Lord Anthony Grabiner for arguments.) "My guys knew the facts and the underlying documentation," says Kalil. "That made all the difference in the world."
Dow's arbitration team was led by the self-effacing Henry Weisburg, with the less self-effacing Emmanuel Gaillard picking up the arguments under Kuwaiti law. Gaillard is straight from central casting—the urbane scholar-statesman with a perfect helmet of salt-and-pepper hair. The balding Weisburg resembles John Malkovich without the weird sex appeal. But they are equally well loved by clients.
At the start of the International Chamber of Commerce hearing in spring 2011, Gaillard's job was to convince the arbitrators that Kuwait's Supreme Petroleum Council had no excuse under Kuwaiti law for canceling the transaction a month after giving its approval. Kuwait said at the time that it withdrew from K-Dow because petroleum prices were nosediving, and at first blush that seems plausible enough. But in truth, the plastic business booms when the feedstock is cheap, and the assets Kuwait passed on have thrived. Some observers believe that the emir killed the deal as a sop to the parliamentary opposition with whom he is struggling.In a cross-examination that three trial-watchers recall as brilliant, Gaillard got a Kuwaiti professor of administrative law to essentially say that Kuwait had the power to do whatever it wanted under Kuwaiti law. One of the arbitrators interjected: "Did you really mean that?" Another asked if Kuwait wished to resume direct questioning, and Lord Grabiner declined with a pained look.
Weisburg spent most of the three-week hearing on damages. He argued that Dow could recover over $1 billion for the increased cost of borrowing to close its deal with Rohm & Haas. He claimed hundreds of millions more for the price of the phantom closing; the capital lost from forced asset sales; and the opportunity cost of forgone capital expenditures. All, Weisburg argued, were foreseeable consequences of Kuwait's pullout under the 1854 English law principles of Hadley v. Baxendale.
Charmingly, Weisburg first read Hadley at a beat-up library table borrowed from his future mother-in-law in September 1974. "It was literally the first case I read in law school," he says, "and it was obviously way over my head."
The arbitrators thought Weisburg understood the case just fine. They awarded base damages of $2.162 billion in May 2012. London partner Richard Kelly persuaded the English High Court to uphold the result in a two-day October hearing (in an accelerated review called for in the arbitration agreement). In February 2013 the tribunal tacked on $318 million for interest and fees, for a grand total of $2.479 billion. In May Dow agreed to forgo the interest, and Kuwait paid $2.195 billion. According to The American Lawyer's Arbitration Scorecard, it is the highest known award of monetary damages to be substantially paid in the history of commercial arbitration.
"I've dealt with the Middle East for over 30 years for Dow, and we've never had a situation where we weren't eventually paid," Kalil says. "My experience with Arab nations is that they ultimately honor their commitments."
Looking back, Dow can smile at the photos of lonely closing rooms filled with toast racks. Thanks to the arbitration team, they belong on Shearman's wall of fame after all.