Diag Human, S.E. v. Czech Republic Ministry of Health, No. 13-0355, (D.D.C. Sep. 27, 2017) [click for opinion]
Plaintiff Diag Human, S.E. (“Diag Human”), an entity incorporated in Liechtenstein, sought to enforce a 2008 arbitral award it obtained against Defendant, the Czech Republic Ministry of Health (the “Ministry of Health”). The underlying dispute arose out of Diag Human’s business of trading in blood plasma and derivatives with the Ministry of Health. When the dispute arose in the early 1990’s, the parties agreed to arbitrate and entered into a contract (the “Arbitration Agreement”) setting forth the dispute resolution procedures. The Arbitration Agreement provided that a party could request a review of any award issued by the tribunal by a reviewing tribunal, similar to an appellate body.
A tribunal was established by the parties in 1997 (the “Tribunal”), which issued an interim award that found the Ministry of Health liable to Diag Human. The Ministry of Health sought review of the interim award pursuant to the Arbitration Agreement’s review mechanism. The reviewing tribunal confirmed the interim award in 1998. The Tribunal then issued a partial award in 2002, awarding Diag Human damages of about $10 million. After the Ministry of Health challenged the partial award, a reviewing tribunal was established, and the award was confirmed. The Ministry of Health then paid Diag Human the $10 million awarded.
In 2005, the Tribunal asked the parties to agree to an expert that would calculate the amount of “lost profits” Diag Human may have suffered in excess of the amount in the partial award. A hearing was held regarding the expert’s report, and, in 2008, a “final award” was issued awarding Diag Human in excess of $400 million. Both parties challenged the “final award.” After several years, a tribunal to review the “final award” was established. During the delay, Diag Human withdrew its challenge of the “final award,” so the reviewing tribunal only addressed the Ministry of Health’s challenge. In 2014, the reviewing tribunal issued a “Resolution,” discontinuing the proceedings and requiring each party to bear its own costs.
Prior to the Resolution, in 2013, Diag Human filed suit in the district court to enforce the “final award” against the Ministry of Health. The Ministry of Health moved to dismiss for lack of subject matter jurisdiction, and the court granted the motion. Diag Human appealed, and the Court of Appeals of the D.C. Circuit reversed and remanded the case to the district court. Diag Human filed an amended complaint, which the Ministry of Health again moved to dismiss. The Ministry of Health argued that the Resolution issued by the final reviewing tribunal nullified the “final award”; that Diag Human’s claims were barred by res judicata or the statute of limitations; and that under the SPEECH Act (2010) the court could not enforce the award. The court, however, only addressed the first ground—whether the “final award” was an enforceable award.
The parties had agreed in the Arbitration Agreement to implement a two-step arbitration process, in which an award would not become effective “if an application for review has been submitted by the other party within 30 days” of receipt of the arbitral award. The court held that “[t]he consequence of this provision is that the award does not enter into effect if a review application has been submitted within the deadline.” As previously noted, both parties requested review of the “final award.”
The court then considered the final reviewing tribunal’s Resolution. The “final award” was made pursuant to Czech law, so the reviewing tribunal held that the Tribunal could not have issued a further award in the case because the “partial award” issued in 2002 decided all of the issues between the parties. According to the reviewing tribunal, Czech law states that “a partial decision may only be issued on one of otherwise separate claims or on a claim against only one of several defendants.” The reviewing tribunal analyzed the “partial award” and found that “despite being designated ‘partial,’ [it] did not purport to resolve one out of a number of separate claims.” Rather, it resolved the sole claim between the two parties. Therefore, the reviewing tribunal concluded that it had to discontinue the arbitration.
Despite discussing the reviewing tribunal’s application of Czech law, the district court stated that it “need not decide the meaning and import of Czech law” because the “final award” never took effect under the Arbitration Agreement. Pursuant to Article V.1(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“), the court found that it could refuse to enforce an award that “has not yet become binding on the parties, or has been set aside or suspended by a competent authority.” Therefore, the court declined to enforce the “final award” because it never took effect and never was binding on the parties. In its final footnote, the court noted, without giving them any weight, that courts in the Netherlands, Belgium and Liechtenstein also declined to enforce the “final award” pursuant to the New York Convention.
A version of this post originally appeared in the November 2017 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.