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Posted: February 29, 2016

Client Q&A: I have a contract with a foreign government-owned company that has refused to pay me. Can I sue it in the United States?

I have a contract with a foreign government-owned company that has refused to pay me. Can I sue it in the United States?

By Vitali S. Rosenfeld

As discussed in a prior post, dealing with foreign parties adds a level of complexity to any litigation. But suing a company owned by a foreign state is a unique endeavor governed by a particular federal statute—the Foreign Sovereign Immunities Act (FSIA). Most business owners may never hear about this piece of legislation—but once it comes into play, it often becomes the centerpiece of the dispute.

History of the FSIA

Historically, foreign states and their agencies used to enjoy absolute immunity from suit in American courts; disputes involving foreign sovereigns were considered to be a matter of international relations, a traditional domain of the executive branch. In the middle of the twentieth century, this doctrine gave way to the theory of restrictive immunity, distinguishing between public acts of foreign sovereigns (which could not be challenged in court) and their private commercial acts (which could be the subject of litigation). The distinction, however, still needed to be made in each particular case. For decades, the Department of State used to make such determinations, leaving them susceptible to political influences.

Eventually, in 1976, Congress enacted the FSIA, making the United States the first nation to codify the law of foreign sovereign immunity by statute and to place the responsibility for immunity determinations entirely into the hands of the judiciary. Many countries have since enacted similar statutes. The FSIA is a comprehensive code governing litigation against foreign states and their instrumentalities in U.S. courts.

FSIA Litigation

Most FSIA litigation takes place in federal courts. While it is possible to file an action in state court, the foreign sovereign defendant will normally have a good ground to remove it to federal court, because the FSIA is a federal statute and thus raises questions of federal law. Notably, the FSIA also prescribes very particular rules of service of process, which have to be meticulously followed in any case against a foreign sovereign.

Who is a Foreign Sovereign?

Of course, the threshold question is, who is a foreign sovereign? The FSIA definition of a “foreign state” includes its “political subdivision” and its “agency or instrumentality.” The latter is, in turn, defined to include an “organ” of a foreign state or its subdivision as well as any other “separate legal person” majority-owned by a foreign state or its subdivision. Such legal persons include corporations and other organizations involved in international business. It is not always readily apparent to foreign counterparties that they are dealing with a government-owned entity. Moreover, the ownership situation may change over time: companies occasionally get nationalized or privatized. But if a company is majority-owned by a foreign government at the time the lawsuit is filed, it is likely to be considered an “agency or instrumentality” of a foreign state, making the FSIA applicable.

FSIA Immunity

Under the FSIA, foreign states (including their agencies and instrumentalities) are presumptively immune from suit unless one of the enumerated exceptions applies. Once the defendant shows that it falls within the FSIA definition of a foreign state, the burden shifts to the plaintiff to demonstrate that one of the exceptions is applicable.

One such exception provides that a foreign sovereign will no longer be immune from suit to the extent that it has waived its immunity “either explicitly or by implication.” The waiver exception is most likely to apply in a contractual setting; it provides an excellent mechanism for a sophisticated counterparty to ensure in advance that it can sue if the contract is breached. As with any contractual provision, however, the specific scope of the waiver will be subject to judicial interpretation. Preferably, the language of the waiver should be carefully crafted by counsel familiar with the intricacies of the FSIA.

Another exception is an agreement to arbitrate the dispute. It is similar in the sense that it also usually arises in the context of a contract with a dispute resolution clause. However, unlike a direct waiver of jurisdictional immunity, an arbitration clause by definition would prescribe that the parties seek resolution in an arbitration forum rather than in court. The plaintiff would thus usually have to proceed to arbitration as the agreement prescribes—and only having obtained an arbitration award, can attempt to enforce it in court.

The Commercial Activity Exception

But what if there is no dispute resolution clause? The commercial activity exception provides that there is no immunity where the claim is based upon commercial activity in the United States, or an act performed in the United States in connection with commercial activity elsewhere, or even an act in connection with commercial activity elsewhere that causes a “direct effect” in the United States. This provision leaves plenty of room for interpretation—including whether certain activity is “commercial” in nature, whether a certain act took place in the United States, whether a certain effect is “direct,” and whether the plaintiff’s claim is “based upon” (rather than incidentally related to) such an act or activity. The commercial activity exception, therefore, gives rise to a lot of judicial analysis.

Other FSIA Exceptions

Other notable exceptions to jurisdictional immunity include the expropriation exception, the real property exception, the tortious act exception, the admiralty exception, the counterclaims exception, and the most recently enacted terrorism exception. Each of these has its own complexities, and navigating them is beyond the scope of this posting.

Judgment Collection

But overcoming the jurisdictional immunity and even winning the case against a foreign sovereign on the merits is not the end of the story. Often, it is just the beginning. How do you enforce the judgment? Granted, enforcing the judgment against any defendant may sometimes be challenging—but the FSIA provides for a whole other layer of immunity known as execution immunity. Here as well, the presumption is that any property of a foreign sovereign is immune from attachment or execution, and the plaintiff must rely on one of the enumerated exceptions.

These exceptions are somewhat broader for property of an “agency or instrumentality” of a foreign state than for property of the foreign state per se. In any event, the subject property must be in the United States. But the property of a foreign state must also itself be “used for a commercial activity in the United States”—whereas any property of an agency or instrumentality in the United States may potentially be subject to execution as long as the entity is engaged in commercial activity in the United States. There are additional requirements. There are also exceptions to the exceptions: for instance, property of a foreign central bank or monetary authority, and property used in connection with military activity, are in all events immune from execution.

Conclusion

Sovereign immunity is a complex and specialized area of the law. Whether you already have a dispute, or are only considering entering into a business relationship, with an entity wholly or partially owned by a foreign government, it is important to consult competent counsel. We have significant experience in FSIA litigation and will be happy to advise you.

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