International Banking

Here are three students’ answers to Essay Question 1 on the fall 2014 final examination. I provide them as examples of good answers written under exam conditions. But you should not assume that every statement in them is correct.

We worked through the same fact pattern in class. It appears as problem 4 on pages 1030-31 of the General Supplement.

Question (44 minutes)

Verdigris is President-for-Life of the Republic of Lividia. Although he has become increasingly unpopular, he intends to retain power for his “entire life” (as he puts it) “and may that life be comfortable and long!” He authorizes the Ministry of Public Tranquility to purchase $1 million worth of riot-control equipment, including shields, batons, tear-gas launchers, electroshock dart guns (Tasers), body armor, and body bags.

Amber Corporation, incorporated and headquartered in Lividia, handles most of the government’s major overseas purchases. When the government wants to acquire a particular item, Amber buys the item and then sells it to the government. The Ministry of Trade and Industry owns 45% of Amber’s shares; Thistle Corporation owns 30%; President Verdigris owns 15%; and his wife, Madame Celeste, owns 10%. Amber’s board of directors consists of the Minister of Trade and Industry, the Minister of Social Betterment, and Madame Celeste. The Ministry of Social Betterment owns 55% of Thistle. Amber normally has few assets outside Lividia.

After the Ministry of Public Tranquility decides what riot-control equipment it wants to acquire with its $1 million, Amber contracts to buy the equipment from Burgundy Corporation. Amber agrees to wire the purchase price to Burgundy’s bank in the State of Yellowstone within 30 days after Amber takes delivery of the equipment. As the Lividian government has long had a good record of paying its bills, Burgundy does not insist that Amber make a down payment or provide a letter of credit.

In keeping with the contract of sale, Burgundy has the equipment delivered to a customs warehouse in Lividia. The Lividian government inspects the equipment, claims to find 10 grams of marijuana in one of the body bags, and seizes the entire shipment for violation of its drug laws. Burgundy learns that the Lividian government does not intend to pay Amber or have Amber pay Burgundy.

Burgundy sues Amber and the Lividian government in federal district court in Yellowstone.

(a)         Under the laws we have studied in this course, can Burgundy hold the Lividian government liable for the $1 million purchase price? Explain.          [36 minutes]

(b)          Would you answer any differently if the contract of sale specified that Yellowstone law would govern the contract? Explain.                                                   [8 minutes]

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These are good answers. But do not assume that they are in all respects accurate.

Part (a)

The Lividian government would most certainly raise immunity under FSIA, claiming that US federal courts lack jurisdiction to sit in judgment against it. In raising FSIA, the defendant has the burden to show immunity. Lividian government will need to show that none of the exceptions under FSIA are applicable. Since Yellowstone is a state, I will assume that Burgundy is a US corporation. The exceptions are each discussed below:

Explicit or implicit waiver:

There does not appear to be a waiver of immunity in this situation, either by Lividian government’s actions or in a contract provision. It is unclear at this point whether the contract has a choice of law clause picking US law to govern. This exception will likely not apply.

Commercial activity:

A foreign state is immune only from suits based on their public, as opposed to commercial, acts. The keys things to look at are precision of relevant activity, whether it was sovereign or commercial in nature, and if it was commercial in nature, does it have the requisite nexus with the US. The sale is from the US to a purchaser in Lividia and so this transaction will have the requisite nexus with the US.

The purchase of goods is most definitely a commercial activity. Even if the purpose of the activity is to arm its military, the nature of the activity controls, not its underlying purpose. Both private and public parties can and do buy riot control equipment (weird private people!).

The issue here is that the Lividian government is not directly involved in the purchase from Burgundy. Amber serves as a middle agent. This is similar to Allen v. Russian Federation, where the plaintiff sues the Russian government, its direct subsidiaries, and its indirect subsidiary. In that case, the court held that the acts of indirect subsidiaries are not agencies or instrumentalities of Russia and FSIA will not offer protection to these entities. Under FSIA, only the direct ownership of a majority of shares by foreign state satisfies the statutory FSIA control requirement to bring an agency or instrumentality under its protection. Here, the government’s agency, Ministry of Trade and Industry only owns 45% of Amber’s shares. It is interesting that President Verdigris owns 15% as well and he appears to have power and authority over Lividia’s actions as a government. Burgundy could possibly argue that Lividia government has effective control. However, the court will likely not pierce the corporate veil since it does so in very rare circumstances only. It is unlikely that a court will find Amber to be controlled by Lividia’s government under the

FSIA control requirement and attribute the commercial activity to Lividia. This exception will thus likely not apply.

Expropriation exception:

There were assets taken here. Burgundy’s goods were seized. However, there is no violation of international law and this does not appear to be a takings situation. The goods were seized under Lividia’s drug laws. There is no concern as to whether a foreign state action is consistent with US law, so even though the seizure may be in violation of US law, as long as it is not a violation of international law, this exception will likely not apply.

Burgundy will likely not have any luck in getting Lividian government into federal court.

Part (b)

The answer will may change if the contract has a choice-of-law clause for Yellowstone, a US state. There is no clear precedent as to whether having a choice-of-law clause will constitute a implicit waiver of immunity. In FSIA’s legislative history, there have been cases where courts found waiver where a foreign state has agreed that the law of a particular country should govern the contract. It may be persuasive that the law choice is Yellowstone, which is a US jurisdiction. However, choice of law clauses merely provides the substantive law that will govern the contract, not the procedures - so US jurisdiction (a procedural aspect of the contract) may not be applicable. It will depend on precedent in Yellowstone to determine whether a court will find jurisdiction in federal court for Lividian government.

Part (a)

The most applicable law we have covered in this course that relates to likely success (or lack thereof) in Burgundy’s (B) suit against Lividian (L) in Yellowstone Federal District

Court is the Foreign Sovereign Immunity Act (FSIA). Generally, US courts do not have jurisdiction over foreign states, the agents and instrumentalities. Exceptions to this general prohibition are when the activity is a Commercial Activity and not a Sovereign Activity.

To resolve this the question of L’s liability to B in a US court we must determine the applicability of the FSIA and determine if any of the relevant exceptions to the FSIA apply.

Was Amber (in purchasing the equipment) acting as Government Entity?

Here there is a strong case to be made that while Amber Corporation is not the government itself or an instrumentality of the government that it was nonetheless a government entity under the direct control of the L Government. The most relevant case law to resolve this Allen v Russian Federation. Similar to the Allen v Russian Federation case which granted Sovereign Immunity to one party in the case that had a very similar ownership structure to L’s ownership of Amber Corp., it is likely that a court would find that Amber Corp is a Government Entity due to the fact that L owns 45% of Ambers Shares directly. The fact that L can exercise further control over Amber through another entity (Thistle Corp) may be relevant for the court from a policy perspective in helping support the idea that Amber is really a government entity; however, under the holding in Allen v. Russian Federation, such control exercised through additional layers of subsidiaries (i.e. control not exercised through direct ownership of shares by the L Government) likely would not confer Government Entity Status. However, the 45% ownership stake is sufficient to make Amber a Government Entity thus immune from prosecution by an American Court.

Did Amber’s Activity Constitute a Commercial Activity (CA) Such That an Exception to the FSIA ought apply?

In evaluating the applicability of the CA exception, we must look specifically at the nature of the conduct that in question to determine if it is commercial in nature or if it is a sovereign activity. Here, while the President of L may claim that the purpose of these purchases were to support his sustained dominance and life long tenure as President, under the Allen v. Russian Federation Case, the purpose of the activity (even if that purpose serves the sovereign’s desires and a sovereign purpose), the purpose is irrelevant. What is relevant is to look at the purchase of the riot gear by Amber Corporation from B and determine if that behavior is of a commercial nature. While some may attempt to argue that the purchase of riot gear by the Ministry of Public Tranquility is an activity only a sovereign can engage in (insofar as the average every day person may not be able to purchase these types of equipment), I believe that much of what is being purchased can be purchased by the everyday citizen and is not a uniquely sovereign activity (such as the regulation of currency or the regulation of hunting quotas or licenses). Therefore, I conclude, that despite it perhaps being a close call, the commercial activity exception to the FSIA likely would apply.

However, there is an additional component to the CA exception that must be considered before concluding that B would be able to bring suit against Amber in the United States. We must determine if there is the required Jurisdictional Nexus with the United States such that the commercial activity in question had a direct effect on the United States - i.e. (as described in the Allen v Russian Federation Case) is this the type of issue that the US courts would want to be able to exercise jurisdiction over. There are three ways to show a Jurisdictional Nexus: 1) was the action based upon a commercial activity carried on in the US by a foreign state (NOT Applicable); 2) was the action based upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere (Probably not Applicable); was the action based upon an act outside the territory of the US in connection with a commercial activity of the foreign state elsewhere and that act caused a direct effect in the United States (Probably Applicable).

Similar to the Callejo case, there is a longstanding business relationship that existed between Amber and B. This is evidenced by the fact that B did not require an Letter of Credit or any downpayment. Amber’s failure to pay clearly had a direct effect on a Corporation of the United States and Amber knew or should have known that failure to make the payment of 1 million dollars that it owed would have such an effect. Furthermore, while the Callejo case did not find the activity as a commercial activity (ruling under the Act of State Doctrine) the court did outline things to consider when determining the nexus to the United States, which includes intent of the parties and the nature of the contract.

It is likely here that Amber’s activity was a commercial activity with sufficient nexus to the USA and thus would not be immune from civil liability under the FSIA.

Part (b)

The result would likely not be any different; however, rather than getting stuck in the muck arguing that the commercial activity exception applied, B would be able to argue in the alternative that the designation of Yellowstone Law as governing the contract could constitute an implicit waiver of Sovereign Immunity since they sought to be bound by Yellowstone Law. Yellowstone and the United States have an interest in the predictability and sanctity of its body of contract law and such a designation in the contract likely means that the US would appropriately exercise jurisdiction over the K.

Part (a)

Pursuant to 28 USC 1604, US courts do not have jurisdiction on actions of a foreign state and they shall be immune from the jurisdiction of US courts, unless the exceptions apply. The exceptions stated under 1605 is waiver exception, commercial activity exception and expropriation exception.

We should first consider if Amber is an agency or instrumentality of the Republic of Lividia. As stated under Allen v. Russian Federation, the standard under 1603 (b) should be met. The provision provides that majority of the shares should be owned by foreign state or a political subdivision. Here 45% is owned by Ministry (a subdivision) but this does not provide majority. The Allen v. Russian Federation states that only a direct ownership of shares provide the requirement, so Ministry’s indirect ownership through Thistle Corporation would not satisfy the Foreign Sovereign Immunities Act for this purpose. The case states that indirect subsidiaries separated by one or more corporate tiers are not instrumentalities and also, the status should be determined at the time of the suit is filed. So, Amber is not an agency or instrumentality of Republic of Lividia.

Apart from this, assuming that Amber was an instrumentality for argument purposes, we should also analyze the commercial activity exception. For the commercial activity exception to apply, we should not consider the motive but ask if the activity conducted by the state (or its agency or instrumentality) is a type of action where t engages in trade; as well as its direct effects. In our case, the sales are bought for purposes of riot control but we should disregard it, as the courts say under Allen v. Russian federation. The activity of buying such equipment is a commercial activity where Amber engages in trade. So we should question the direct effects in State of Yellowstone. Direct effect is one which has no intervening element but rather flows in a straight line without deviation. The court have stated that the mere financial loss to a US citizen’ as here us not a direct effect. So the commercial activity exception would fail here. Also, if we consider the jurisdictional nexus, there would be no substantial effect in US.

To sum up all, the commercial activity exception would not apply and Amber would be immune from US courts.