## Facts

- Sonatrach and Distrigas entered a 20-year contract for the supply and purchase of Algerian liquefied natural gas.
- The contract contained an arbitration clause requiring International Chamber of Commerce arbitration in Geneva, Switzerland.
- Distrigas filed for Chapter 11 bankruptcy and rejected the contract as an executory contract under 11 U.S.C. § 365.
- Sonatrach asserted a damages claim arising from the rejection and sought to commence ICC arbitration to determine liability and damages under the contract.
- The bankruptcy filing triggered the automatic stay under 11 U.S.C. § 362, preventing Sonatrach from starting arbitration without relief from the stay.
- The bankruptcy court denied Sonatrach’s motions to modify the stay, reasoning that rejection made the arbitration clause “moot” and that international arbitration would burden the estate.
- Sonatrach appealed the stay rulings to the district court.

## Issues

1. Whether rejection of an executory contract under 11 U.S.C. § 365 terminates the contract (and extinguishes the arbitration clause) or instead constitutes a breach that leaves the arbitration clause enforceable.
2. If the arbitration clause survives rejection, whether the automatic stay should nonetheless remain in place because ICC arbitration would unduly interfere with administration of the bankruptcy estate.

## Decision

- The district court reversed the bankruptcy court’s orders denying relief from the automatic stay.
- The court held that rejection under § 365 is a breach, not a termination, and thus does not render the arbitration clause unenforceable.
- The court concluded the arbitration clause was separable from the underlying contract obligations and survived the rejection.
- The court ordered the automatic stay modified to permit Sonatrach to commence ICC arbitration in Geneva to resolve liability and damages under the contract.

## Legal Principles

- Rejection of an executory contract under 11 U.S.C. § 365(g) constitutes a breach as of the petition date and does not, by itself, rescind or terminate the agreement for all purposes.
- An arbitration clause is treated as separable from the main contract; breach or repudiation of substantive duties does not nullify the agreement to arbitrate absent a clause-specific challenge.
- Federal law reflects a strong policy favoring enforcement of arbitration agreements, with added force in international commercial disputes.
- Relief from the automatic stay may be appropriate when arbitration will not materially frustrate bankruptcy administration and when countervailing federal policies favor enforcement of the parties’ arbitration agreement.

## Conclusion

The district court held that contract rejection in bankruptcy operates as a breach rather than a termination, so the parties’ ICC arbitration clause remained enforceable, and it modified the automatic stay to allow international arbitration to proceed on liability and damages.


Societe Nationale Algerienne Pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures (Sonatrach) v. Distrigas Corp., 80 B.R. 606 (D. Mass. 1987)