by Ernesto J. Sanchez (Attorney-at-Law, Miami)
The U.S. Federal Arbitration Act (FAA), which explicitly incorporates the New York Convention into U.S. law, provides for the judicial facilitation of private dispute resolution through arbitration where a transaction at issue concerns “interstate commerce.” More specifically, the FAA allows for contractually based compulsory and binding arbitration, whereby parties give up the right to a court appeal on substantive grounds.[1]
As a result, if a U.S. court finds that a claimant and a defendant qualifying as a foreign sovereign under the U.S. Foreign Sovereign Immunities Act (FSIA) (e.g., a foreign central government or political subdivision or agency or instrumentality thereof), which governs foreign state immunity in the U.S., consented to arbitration, that court will have subject matter jurisdiction to determine whether the parties entered into the arbitration agreement necessary to abrogate the defendant’s immunity.[2] In the U.S., as in numerous other countries, consent to arbitration has the effect of waiving foreign sovereign immunity.[3]
An arbitration agreement exists within the meaning of the FAA and the New York Convention if (1) there is a written agreement; (2) the writing provides for arbitration in the territory of a Convention signatory; (3) the subject matter is commercial; and (4) the subject matter is not entirely domestic in scope.[4] Because a contract is formed when there is a meeting of the minds of the parties on the contract’s essential terms, courts examine parties’ written communications to determine whether they have formed an enforceable arbitration agreement.[5]A recent U.S. court decision reflects this framework. In the case of Diag Human S.E. vs. Czech Republic – Ministry of Health, plaintiff Diag Human, a Liechtenstein corporation and one of the world’s largest blood plasma suppliers, had entered into a commercial relationship with Danish pharmaceutical company Novo Nordisk. But the Czech Republic’s health minister allegedly sent a letter to Novo Nordisk intended to dissuade Novo Nordisk from continuing this relationship by noting concerns about Diag Human’s ethics. An arbitration panel found that the Czech Republic had caused commercial loss to Diag Human, leading to litigation to enforce the arbitration award under the New York Convention in, among other places, a Washington, D.C. federal trial court.
The court found that the claims undergoing arbitration were tort-based claims alleging interference with Diag Human’s commercial activities, as opposed to commercial claims alone. In other words, there had been no pre-existing commercial relationship between Diag Human and the Czech Republic.[6] The FSIA provides for the enforcement of arbitral awards if the arbitration at issue takes place or is intended to take place in the U.S. or the underlying claim, save for the arbitration agreement, implicated an exception to foreign sovereign immunity enumerated in the FSIA.[7] Since the Diag Human arbitration had not taken place in the U.S., nor did the FSIA establish an exception to foreign sovereign immunity arising from tortious interference with contractual relations, the court lacked subject jurisdiction over the matter and could not enforce the award.[8]
The Diag Human case thus evidences how foreign sovereign immunity still poses an obstacle to the enforcement of foreign commercial arbitral awards in the U.S., despite the New York Convention’s strong enforcement standards and the fact that the FSIA remains one of the world’s most permissive foreign state immunity statutes. It is, therefore, especially important that claimants and their counsel understand the New York Convention’s interplay with the FSIA before spending time and resources on seeking enforcement of a foreign commercial arbitral award in a U.S. court. Reckless forum shopping in favor of the U.S. for enforcement of arbitral awards against foreign sovereigns simply presents too many risks of defeat.
Ernesto J. Sanchez is an attorney in Miami, Florida who focuses his practice on international law issues. He is the author of The Foreign Sovereign Immunities Act Deskbook, which concerns the law governing lawsuits against foreign governments in U.S. courts.
[1] See 9 U.S.C. § 1 et seq.
[2] See, e.g., U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 241 F.3d 135, 151 (2d Cir. 2001).
[3] See 28 U.S.C. § 1605(a)(6).
[4] Balen v. Holland America Line, Inc., 583 F.3d 647, 654-55 (9th Cir. 2009); Bautista v. Star Cruises, 396 F.3d 1289, 1294-95 (11th Cir. 2005); Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 449 n.13 (3d Cir. 2003); U. S. Titan, 241 F.3d at 146.
[5] U.S. Titan, 241 F.3d at 146.
[6] See Diag Human S.E. v. Czech Republic – Ministry of Health, No. 13-0355, slip. op. at 8 (D.D.C. August 14, 2014).
[7] Supra note 3.
[8] Supra note 5.
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