Case of the Day: DRC v. Honduras

The case of the day is DRC, Inc. v. Republic of Honduras (D.D.C. 2014). I last covered the case back in March 2011. DRC had a contract with Fondo Hondureño de Inversión Social (“FHIS”) for construction of water and wastewater projects in the aftermath of Hurricane Mitch. FHIS was a “sub-entity” of the Republic of Honduras. DRC’s claim was that FHIS had failed to pay money due under the contract. An arbitral tribunal sitting in Honduras awarded DRC more than $51 million.

The dispute spawned several proceedings: a claim by DRC against the US government in the Court of Federal Claims (the government had funded the work DRC did in Honduras); a False Claims Act suit by the United States against DRC; and an action for confirmation of the arbitral award by DRC against FHIS in the Honduran courts. In the prior decision, the court had stayed the US confirmation proceedings pending resolution of the confirmation proceedings in Honduras.

In the interim, the Supreme Court of Honduras finally denied DRC’s attempt to confirm the award in Honduras. The US proceedings were then reopened, and the first—and dispositive—question was subject-matter jurisdiction. DRC was seeking to enforce the award against Honduras itself, even though its agreement to arbitrate was with FHIS and the award was against FHIS. The FSIA provides an exception to sovereign immunity where:

the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration under the laws of the United States, or to confirm an award made pursuant to such an agreement to arbitrate, if … the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.

28 U.S.C. § 1605(a)(6)(B). In order to decide if this exception applied, the court had to decide whether the FHIS was the kind of entity that, under the precedents, enjoys a presumption of separateness from the Honduran state, and if so, whether the presumption applies on the facts of the case.

The judge held that FHIS did indeed have a presumption of separateness. The relevant factors, under First National City Bank v. Banco Para El Comercio Exterior De Cuba, 462 U.S. 611 (1983), include: creation by an enabling law that specifies the entities’ powers and duties; juridical personality; management by a government-selected board; primary responsibility for its own finances; and operation as a distinct enterprise not subject to the same administrative requirements applicable to government agencies. FHIS had an enabling statute, juridical personality and the power to contract, and administrative autonomy “within the limits of” the enabling law. On the other hand, it was unclear whether FHIS had the power to own real property (though it apparently held its financial assets in its own name), and its administrative autonomy was limited in light of government powers of oversight concerning its finances and the fact that most of its resources came from government appropriations. Honduras’s president acted, in effect, as chairman of FHIS’s board of directors, while other high government officials also served oversight or executive roles. The judge concluded, though, that many of the facts suggesting real government control were also true of the Cuban bank at issue in the First National City Bank case, and there, the Supreme Court held that the bank was entitled to the presumption of separateness. On the strength of that precedent, the judge held that FHIS was entitled to the presumption, too. The judge rejected DRC’s interesting attempt to focus on the distinction, for purposes of the service of process provisions of the FSIA, on a state itself and the agencies or instrumentalities of the state (the rules for service of process differ depending on this analysis). Perhaps FHIS would be treated as the state itself for purposes of determining how to go about serving process. The DC Circuit’s test for deciding this question was a test that looked at the “core functions” of the entity in question. But the judge noted that the DC Circuit had limited the applicability of the “core functions” test to questions of categorizing an entity for purposes of service of process under § 1608.

I’m not saying the judge got this wrong, but it is at least anomalous that the FSIA could be read in such a way that the service of process requirements of § 1608(a) apply to an entity because it is to be treated as the state itself, but the state is to be accorded immunity from suit on a claim on which the entity itself would not be immune, because the state and the entity are presumed to be separate. The judge could have further developed this theme, and perhaps it will be further developed on appeal.

In any event, having decided that FHIS was entitled to the presumption of separateness, the judge went on to inquire whether the presumption had been overcome. There is an exception for cases where the entity is acting as the state’s agent. The key question here was whether the Honduran state had actually exercised control over FHIS. Although under the general law of agency it may be enough to have the right of control even if the principal does not actually exercise it in the case at hand, the judge held that in the sovereign context, DC Circuit law required actual exercise, citing Transamerica Leasing, Inc. v. Venezuela, 200 F.3d 843 (D.C. Cir. 2000). There is another exception in cases of fraud and injustice. DRC asserted that it reasonably believed that FHIS was acting with the authority of the Honduran state, but the judge reasoned that even if that were so, it was unclear how DRC’s reasonable belief was an essential inducement to contracting: DRC, after all, had earlier sought to confirm the arbitral award against FHIS itself in the Honduran courts.

One response to “Case of the Day: DRC v. Honduras”

  1. Murray farmer

    The republic of Honduras conned drc, usaid and the department of state represented that this was part of the host country after all it was a host country contract. To see more facts go to

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