Case of the Day: DRC, Inc. v. Republic of Honduras

The case of the day, DRC, Inc. v. Republic of Honduras (D.D.C. 2011), is an action to enforce an arbitral award made in Honduras.  It is also the first case of the day arising under the Panama Convention. (Why does the Panama Convention, rather than the New York Convention, apply? The FAA has an express provision providing that the Panama Convention prevails when “a majority of the parties to the arbitration agreement are citizens of a State or States that have ratified or acceded to the Inter-American Convention and are member States of the Organization of American States”).

DRC had a contract with the Honduran government to construct water and wastewater projects in the aftermath of Hurricane Mitch. According to Honduras, the contract provided that the U.S. Agency for International Development would pay DRC for its work.; USAID gave DRC a “letter of commitment” to that effect. After a dispute about payment arose, DRC sued the United States in the Court of Federal Claims. The United States then sued DRC in the District Court for the District of Columbia asserting claims under the False Claims Act (in particular, that DRC was guilty of fraud in the procurement and performance of the contract), and it moved to stay the case in the Court of Federal Claims on the grounds that the outcome there would depend on the resolution of the fraud question. That court granted the motion to stay. DRC unsuccessfully sought to dismiss the False Claims Act case. Thus there are now two pending cases between DRC and the United States–DRC’s claim for payment, which has been stayed, and the False Claims Act case, which is in discovery.

After the court denied DRC’s motion to stay the False Claims Act case, DRC demanded arbitration with the Honduran government for breach of the construction contract. The arbitration took place in Honduras. The tribunal awarded DRC $51 million in damages. DRC filed a petition in the Supreme Court of Honduras seeking “acknowledgment and execution” of the award (I take it this is the same as recognition and enforcement). DRC requested a sixty-day stay of the Honduran proceedings while the parties sought to settle the case, and the court stayed the case as requested. In parallel with the Honduran proceedings, DRC sought to enforce the award in the U.S. District Court, and Honduras sought to stay or dismiss the action.

Article VI of the Convention provides:

If the competent authority mentioned in Article 5. 1. e has been requested to annul or suspend the arbitral decision, the authority before which such decision is invoked may, if it deems it appropriate, postpone a decision on the execution of the arbitral decision and, at the request of the party requesting execution, may also instruct the other party to provide appropriate guaranties.

Honduras sought a stay pending resolution of the Honduran action on the grounds that that action was first in time and would be dispositive. Judge Friedman agreed. There was an “inherent tension” between the public policy in favor of arbitration and the sensible concern not to act improvidently by enforcing an award where proceedings are pending at the seat of the arbitration. Citing the Second Circuit’s decision in Europcar Italia S.p.A. . Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998), the judge held that the factors to be considered include: (1) the general objectives of arbitration, including expedition and avoidance of litigation; (2) the status of the foreign case and the estimated time its resolution; (3) whether the award will receive greater scrutiny in the foreign proceeding than in the US proceeding; (4) whether the foreign proceeding was one for enforcement or one for vacatur, and whether they were initiated by the party seeking enforcement in the US or with an intent to hinder or delay resolution of the dispute; (5) the balance of hardships; and (6) any other relevant circumstances. The court held that the factors weighed in favor of a stay: the Honduran action was one for enforcement; it was brought by DRC, which was also the plaintiff in the US action. The stay in the Honduras action did not weigh against a stay, because it was DRC that had sought the stay.

The court refused to order Honduras to give security for the stay, as Article VI would permit, on the grounds that Honduras was a sovereign “that presumably is solvent and would comply with legitimate orders issued by courts in this country or in Honduras.”

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