US Court blocks enforcement of award due to effect of the terms of arbitration agreement

In Diag Human S.E. v Czech Republic Ministry of Health, the United States District Court for the District of Columbia (the Court) has dismissed an application brought by Diag Human (Diag) to enforce a 2008 arbitration award it obtained against the Czech Republic. The decision rests on the implications of triggering a review process that the parties had agreed in their arbitration agreement and is illustrative of the importance in making sure that any bespoke review or appeal proceedings which are agreed by the parties are clear as to their effect on any award.

Background

The background is more fully described in our blog posts here and here. In summary, Diag and the Czech Ministry of Health agreed to arbitrate claims by Diag that the actions of a senior Czech official had crippled its business activities in the Czech Republic. Further to an ad hoc arbitration under the Czech Arbitration Act 1994, and subsequent to the tribunal having issued an interim award and a partial award (the Partial Award), a final award (the Award) was issued in 2008 ordering the Czech Republic to pay Diag over US$325m in damages as well as both pre and post-award interest. However, the arbitration agreement provided for a review process, under which “an arbitral award could be subject to review by a second tribunal of arbitrators…selected in the same manner as the first and subject to the same rules of procedure” if a party submitted an application for review within 30 days of receipt of the award to be reviewed. If no application for review was submitted within 30 days, then the award would take effect and be enforceable. Both parties triggered the review process in relation to the Award within the 30 day period (although Diag later withdrew its application) and a second tribunal (the Review Tribunal) was constituted to review the Award. The Review Tribunal issued its final resolution (the Resolution) in 2014. The Review Tribunal upheld the Czech Republic’s position that, under Czech law, the Partial Award constituted the entire award issued to Diag. On this basis, it decided in its Resolution that: (i) the review proceedings are discontinued and (ii) neither party shall be entitled to compensation of the costs of the review proceedings. As discussed further below, in these enforcement proceedings before the Court each party took a different position on how the Resolution affected the Award.

Enforcement Proceedings During the Review

Diag brought a series of legal proceedings in a number of jurisdictions concurrent with the review process in an attempt to enforce the Award. The Austrian courts in 2013 determined that the Award could not be binding as the review process was still pending at the time, and a similar decision was taken in the French courts the following year. An application in the English courts was again met with a dismissal due in part to the fact that the review process had been triggered, and also due to the determination that the decision in the Austrian courts created an issue estoppel (see our blog post here).

Enforcement Proceedings Following the Review

In the US, Diag filed an application to enforce the Award in 2013. The Czech Republic moved to dismiss the complaint on numerous grounds and the dismissal was granted after the judge found that the parties did not have a commercial relationship and as such the Czech Republic benefitted from sovereign immunity. This decision was overturned in 2016 by the US Court of Appeals for the DC Circuit, which remanded the case to the lower court. See our blog post here.

The case therefore once again came before the Court. In these proceedings the Czech Republic argued, amongst other things, that the Resolution nullified the Award and therefore there was nothing to enforce. Diag contested that the Resolution had no effect on the Award because it was procedural in nature only, and that only the “decretal” paragraphs of the Resolution (discontinuing the review proceedings and deciding that each side should bear its own costs thereof) had any legal effect.  On this basis, Diag argued that the discontinuation of the review proceedings left the Award intact and enforceable.

The judgment

The Court determined the Award was not a final award that could be enforced under the New York Convention 1958. The Convention provides a number of grounds on which courts may to refuse or defer recognition of a foreign arbitral award, one of which is if the party challenging the enforcement is able to show that the “award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made“.

The arbitration agreement stated that any award “will enter into effect” and the parties will implement the award “if the review application of the other party has not been submitted in the deadline“. However, a review application had been submitted by the Czech Republic within the 30 day deadline so the Award was held not to have entered into effect. The discontinuation of the review proceedings by the Review Tribunal in 2014 effectively ended the arbitration. Therefore by operation of the parties’ own arbitration agreement, the Award never took effect and so never became binding.

Comment

Whilst a refusal to enforce a foreign award under the New York Convention often causes concern, this decision highlights the importance the Court placed on the terms of the parties’ arbitration agreement.  The Court has blocked Diag from being able to enforce the Award, however the decision is consistent with a respect for party autonomy and freedom of contract, as well as showing deference to the jurisdiction of the arbitral tribunal. As the Judge stated in her decision, the courts are “neither authorised to second guess the…[Review] Tribunal’s [R]esolution nor ignore the terms of the arbitration agreement“. The outcome of the US proceedings is consistent with the outcome in other pro-arbitration jurisdictions in which Diag has sought to enforce the Award.

It is important for parties to consider carefully how any review process in an arbitration agreement will operate, the implications for enforcement of an award once that review process has been triggered and whether the outcome of a review will deliver sufficient clarity in relation to the effect on any previous award.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Of Counsel, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

 

Christian Leathley
Christian Leathley
Partner
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+1 917 542 7812
Amal Bouchenaki
Amal Bouchenaki
Of Counsel
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+1 917 542 7830
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
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+44 207 466 7585

 

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