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US Courts Have Jurisdiction to Enforce US$325 Million Czech Arbitration Award: DC Circuit
Practical Law Legal Update w-002-5470 (Approx. 6 pages)
US Courts Have Jurisdiction to Enforce US$325 Million Czech Arbitration Award: DC Circuit
by Practical Law Arbitration
| Published on 06 Jun 2016 • District of Columbia, International |
In Diag Human S.E. v. Czech Republic-Ministry of Health, the US Court of Appeals considered an appeal from a judgment refusing a request for recognition and enforcement of an arbitral award rendered in the Czech Republic under the New York Convention.
In Diag Human S.E. v. Czech Republic-Ministry of Health, the US Court of Appeals for the District of Columbia considered whether US courts have jurisdiction to enforce a Czech-seated arbitral award rendered (824 F.3d 131 (D.C. Cir. 2016)). The lower court refused to enforce the award under the New York Convention on the grounds that the parties, who entered into a post dispute agreement to arbitrate, did not have a pre-existing commercial relationship. Without a commercial relationship, the court would lack jurisdiction under the US Foreign Sovereign Immunities Act (FSIA) (see Legal update, New York Convention Does not Apply to Arbitral Award Where Parties Had No Commercial Relationship (DC District Court)).
The court of appeals reversed, holding that under the FSIA and the New York Convention, all that was required was "a defined legal relationship, whether contractual or not." The agreement at issue qualified as a defined legal relationship. The DC Court is the latest in a line of courts to consider enforcement of 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.
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:
- There is a written agreement.
- The writing provides for arbitration in the territory of a signatory of the Convention.
- The subject matter is commercial.
- The subject matter is not entirely domestic in scope.
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.
The US District Court for the District of Columbia held that the award did not fall under the New York Convention and, therefore, the court lacked jurisdiction to enforce it. The court based its conclusion on the text of the FAA defining awards subject to the New York Convention. The court 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 court noted, before Diag sued the Czech Ministry, there had been no pre-existing relationship between the parties of any kind. Because the Convention did not apply, in the court's view, the Czech government did not waive sovereign immunity.
The Court of Appeals reversed. Under both the FSIA and the New York Convention, all that was required was "a defined legal relationship, whether contractual or not" (see 28 U.S.C. § 1605(a)(6) and New York Convention Article II (1)). The New York Convention also requires a that the relationship be "commercial" but that term is understood to apply broadly. The court cited its decision from last year in in Belize Soc. Dev. Ltd. v. Belize to repeat that in the field of international arbitration, "commercial" refers to "'matters or relationships, whether contractual or not, that arise out of or in connection with commerce'" (794 F.3d 99, 104 (D.C. Cir. 2015), quoting Restatement (Third) of U.S. Law of Int'l Comm. Arbitration § 1-1 (2012)). As Diag was a supplier of a commercial product (blood plasma), its activities had a connection to commerce.
Because the District Court had dismissed on jurisdiction grounds, the Court of Appeals remanded the case for consideration of whether the award should be recognized and enforced.