The US District Court for the District of Columbia has refused to recognize and enforce an arbitral award rendered in the Czech Republic because the parties to the award did not have a commercial relationship. The DC Court is the latest in a line of courts to have refused to enforce the same award (albeit on different grounds); see, for example, Legal update, Issue estoppel bars enforcement of award under New York Convention (Commercial Court).

The plaintiff, Diag, was a large-scale blood plasma supplier. One of its principal commercial relationships was with the Danish company, Novo Nordisk. Diag claims that the Czech Minister of Health sent a letter to Novo Nordisk about a public bidding tender for blood plasma products that dissuaded Novo Nordisk from continuing to do business with Diag. Diag sued the Czech Ministry of Health in the Prague Commercial Court for defamation and unfair competition. The parties then agreed to arbitrate their dispute in the Czech Republic. The arbitrators rendered a final award directing the Czech Ministry to pay approximately $325 million in damages and interest (Final Award, ). Diag petitioned the district court to enforce the award under US law, pursuant to the New York Convention.

The Federal Arbitration Act (FAA)codifies the New York Convention into US law. Courts use a four-part test to determine whether the Convention and the FAA applies. The test requires that:

(U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., 241 F.3d 135, 146 (2d Cir. 2001).)

Here, there was no dispute that the first, third and fourth conditions favored enforcement of the award. Regarding the third condition, the Czech Ministry argued that the claims in the arbitration were tort-based and not commercial. Diag argued that, because the award relates to a commercial dispute and awarded damages for unfair economic competition, the subject matter of the award was commercial.

Judge Amy Berman Jackson held that the award did not fall under the New York Convention and, therefore, the court lacked jurisdiction to enforce it. She based her conclusion on the text of the FAA defining awards subject to the New York Convention: "An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention" (9 USC § 202). From this language, Judge Jackson concluded that it is the nature of the relationship between the parties, not the nature of their dispute, which determines whether the New York Convention applies. Here, the judge noted, before Diag sued the Czech Ministry there was no pre-existing relationship between the parties of any kind.

The logic of Judge Jackson's decision suggests that investment treaty arbitration awards may not be enforced in the US under the New York Convention if the basis for the award is unlawful regulatory measures by the host state (for example, expropriation claims and "fair & equitable treatment" claims), instead of a contractual relationship between the claimant and the host state. This result would surprise international arbitration practitioners. In BG Grp., PLC v. Republic of Argentina, the US Supreme held that an arbitration award against Argentina should be confirmed under the New York Convention and section 207 of the FAA (134 S. Ct. 1198, 1205 (2014)); see Legal Update, The US Supreme Court Decides BG v. Argentina – Right Place, Wrong Road? In that case, the claimant and the Argentine government had no contractual relationship; the arbitration was based on a treaty entered into between the UK and Argentine governments.

Case: Diag Human S.E. v. Czech Republic-Ministry of Health, 64 F.Supp.3d 22 (D.D.C. 2014), rev'd, 824 F.3d 131 (D.C. Cir. 2016)