In DRC, Inc. v. Republic of Honduras, No. 10-0003 (D.D.C. Oct. 23, 2014), the U.S. District Court for the District of Columbia refused to exercise jurisdiction over an enforcement action brought against the Republic of Honduras. The court found that the arbitration exception to the Foreign Sovereign Immunities Act did not apply where Honduras was not a party to the arbitration and the award was rendered against a separate and independent legal entity.
Case Background
Following a major hurricane in Honduras, U.S. company DRC, Inc. (“DRC”) bid on and won a reconstruction contract with the Honduran Social Investment Fund (“FHIS”), a sub-entity of the Republic of Honduras (“Honduras”). A payment dispute led to arbitration between FHIS and DRC in Honduras under Honduran law, where a tribunal awarded DRC $51 million.
DRC brought a confirmation action in federal court in the United States, seeking to enforce the award against Honduras, rather than FHIS. Honduras advanced numerous grounds for dismissal of the confirmation action, including the argument that it enjoyed sovereign immunity.
The district court sided with Honduras on the ground that the Foreign Sovereign Immunities Act (the “FSIA”) prevented the court from exercising subject matter jurisdiction in the case.
FSIA Analysis
Under the FSIA, a foreign state, defined broadly to include agencies of a foreign sovereign, enjoys full immunity from suit in federal court unless the case falls within one of several statutory exceptions. In bringing suit against Honduras, DRC relied on the so-called “arbitration exception,” which provides for jurisdiction over efforts to confirm arbitral awards falling within the scope of certain international agreements such as the New York Convention and the Panama Convention.
Honduras contended that it could not be sued under the arbitration exception because (1) Honduras was not a party to the original contract containing an arbitration clause; (2) it was not a participant in the arbitration proceedings, and (3) the arbitral award was not rendered against it but, instead, against a separate and independent entity.
The court acknowledged that, had the confirmation action been brought against FHIS—the party against whom the original award was obtained in Honduras—the court would have had subject matter jurisdiction. However, the court explained, the arbitration exception would only operate to deprive Honduras of immunity if FHIS were, as DRC alleged, an “organ” or “agent” of Honduras that should not be treated separately.
Noting FHIS’s “separate legal personality” and substantial degree of autonomy, the court concluded that FHIS’s “establishment as a juridically independent entity entitles it to a presumption of separateness from [Honduras] for purposes of determining whether the [c]ourt has subject matter jurisdiction.” The court next concluded that DRC had failed to overcome that presumption by demonstrating either that Honduras “dominated FHIS or otherwise made FHIS its agent” through the exercise of actual control, or that the court’s “failure to disregard the presumption would work a fraud or injustice.”
Thus, the court ultimately agreed with Honduras that “because [Honduras] was not itself a party to the arbitration agreement between [DRC] and FHIS, and as the arbitral award was issued solely against FHIS, a separate and independent entity, [the court] lacks jurisdiction to entertain [DRC’s] petition to confirm the award against [Honduras].”
