The Foreign Sovereign Immunities Act (FSIA) provides U.S. courts statutory jurisdiction over foreign states. 28 U.S.C. §1605(a)(6)(B).  The FSIA provides foreign states immunity from suit unless one of a number exceptions apply.  One such exception is the “commercial activity” exception, which provides that a foreign state shall not be immune from U.S. jurisdiction when the action that forms the basis of the suit is based [1] upon a commercial activity carried on in the U.S by the foreign state; …or [3] upon an act outside the territory of the U.S. in connection with a commercial activity of the foreign state that causes a direct effect in the U.S.

The Ninth Circuit Court of Appeals was recently asked to decide whether the district court had subject matter jurisdiction over Iraq pursuant to the FSIA. Specifically, whether Iraq carried its burden of showing that neither of the commercial activity exceptions to sovereign immunity is applicable.  In Terenkian v. Republic of Iraq, 2012 WL 4075792 (9th Cir. Sept. 18, 2012), the court held that the federal courts have no subject matter jurisdiction over Iraq because it had met its burden of showing that neither clause of the commercial activity exception applied.

The case involved two Cyprus oil brokerage companies, Pentonville and Marblearch, which entered into two separate contracts with State Oil Marketing Organization (SOMO), a company wholly owned by the Republic of Iraq.  The contracts were made pursuant to the Oil for Food Program, which allowed Iraq, notwithstanding the embargo, to sell its oil to provide for the humanitarian needs of the Iraqi people hurt by the international trade sanctions. The contracts further provided for delivery in Iraq, and payment into a United Nations escrow account. Subsequent to execution of the contracts, Iraqi officials allegedly demanded that Pentonville and Marblearch pay SOMO additional fees not required under the contract. When both refused, SOMO unilaterally cancelled the contracts. Terenkian, president and sole shareholder of the two companies, sued in U.S. district court for breach of contract. Iraq subsequently moved to dismiss for lack of subject matter jurisdiction on the ground that it had immunity pursuant to FSIA. The district court denied Iraq’s motion to dismiss, ruling that Iraq was not entitled to sovereign immunity because the “commercial activity” exception applied.

The Ninth Circuit reversed. The court rejected plaintiff’s first argument that Iraq does not have sovereign immunity from suit because the first clause of the commercial exception applies –  namely that plaintiff’s action (i.e., contracts executed at the Cyprus Mission to the United Nations, located in New York) is based upon a commercial activity carried on in the US by Iraq. While the court agreed that the two contracts for the sale of oil constituted a commercial activity, it  found that the activity did not constitute a commercial activity for purposes of the FSIA because “execution of a contract in the US alone, without more, is not sufficient to constitute a significant activity or a substantial contact” with the U.S.  It also rejected plaintiff’s second argument that Iraq’s breach of the contracts had direct effects in the US (i.e., some of the oil intended for purchase was meant for the US market and payment for any oil purchased to be made by deposit into a New York bank account). The court found that these two activities had an indirect effect and were not legally significant acts. The Court further noted that, based on precedent, the place of performance for the foreign state’s ultimate contractual obligations must be the US. Here Iraq   had no obligation to perform in the US because the contract provided for delivery in Iraq and its cancellation, the act which forms the basis of the lawsuit, occurred in Iraq.

The decision has important implications for private companies who may decide to pursue cases against foreign governments in U.S. courts to address wrongdoings abroad.  This case shows that it is not enough for the contract to be executed in the U.S., or that payment may be made into a U.S. account for these activities to fall within the “commercial activity” exception, and thus prevent a foreign state to invoke immunity.

 For further information, please contact:  Nicholas P. Connon, Managing Partner and Chair of the Middle East Practice Group; Tel:  +1.626.638.1757; e-mail: nconnon@connonwood.com