DRC, Inc. v. Republic of Honduras, No. 10-0003 (D.D.C. Oct. 23, 2014) [click for opinion]

Following a major Hurricane in Honduras, DRC, Inc. (“Petitioner”) bid on and won a reconstruction project and signed a contract with the Honduran Social Investment Fund (“FHIS”), a “sub-entity” of the government of Honduras. A dispute over money due led to arbitration in Honduras, where a tribunal awarded Petitioner $51 million.

Petitioner sued the Republic of Honduras (“Respondent”) in federal court in the United States in an attempt to confirm the award it had obtained against FHIS. Respondent advanced numerous grounds for dismissal of the confirmation action, including the argument that Respondent enjoyed sovereign immunity.

The district court sided with Respondent on the ground that the Foreign Sovereign Immunities Act (the “FSIA”) prevented the court from exercising subject matter jurisdiction in the case.

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. Petitioner 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 thePanama Convention.

Respondent contended that it could not be sued under the arbitration exception because (1) Respondent 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 Respondent of immunity if FHIS were, as Petitioner alleged, an “organ” or “agent” of Respondent that should not be treated separately.

The court concluded, in light of FHIS’s “separate legal personality” and substantial degree of autonomy, that FHIS’s “establishment as a juridically independent entity entitles it to a presumption of separateness from [Respondent] for purposes of determining whether the [c]ourt has subject matter jurisdiction.” The court next concluded that Petitioner had failed to overcome that presumption through demonstrating either that Respondent “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 Respondent that “because Respondent was not itself a party to the arbitration agreement between Petitioner and FHIS, and as the arbitral award was issued solely against FHIS, a separate and independent entity, [the court] lacks jurisdiction to entertain [Petitioner’s] petition to confirm the award against [Respondent].”

Jean-Paul Theroux of the Washington, DC office contributed to this summary.