Northrop Corp. Triad International Marketing, S.A.

In October 1970, Northrop Corporation (Northrop) (plaintiff) and Triad International Marketing, S.A. (Triad) (defendant) entered a marketing agreement providing that Northrop would pay Triad a sales commission for Triad’s services in soliciting contracts for aircraft and related maintenance, training, and support services for the Saudi Air Force. The marketing agreement also contained an arbitration clause and a choice-of-law clause, which provided “validity and construction of this Agreement shall be governed by laws of state of California.” Northrop made substantial sales to the government of Saudi Arabia and paid Triad a substantial part of commissions due under the marketing agreement. On September 17, 1975, the government of Saudi Arabia issued Decree No. 1275, which prohibited payment of commissions related to armaments contracts. In response, Northrop ceased paying commissions to Triad. Triad sought arbitration under AAA Rules before an arbitral tribunal. Northrop argued that Saudi Decree No. 1275 rendered the marketing agreement invalid under California Civil Code § 1511. The arbitral tribunal entered an award for Triad, finding Saudi Decree No. 1275 did not prevent Northrop from paying Triad its commissions. Northrop sought an annulment of the award in the United States district court, arguing that the arbitrators violated United States public policy. The district court concluded Saudi Decree No. 1275 prohibited payment of the commissions to Triad. The district court, therefore, refused to enforce the arbitral award. Triad appealed to the Ninth Circuit. On appeal, Northop argued California law forbade enforcement of a contract where performance of the contract is illegal in a foreign state.