New FSIA Decisions from U.S. Court of Appeals

So far in August, the U.S. Court of Appeals have issued several notable decisions regarding sovereign immunity. Most recently, in  Agudas Chasidei Chabad of United States v. Russian Federation, 2024 WL 3659318 (D.C. Cir. Aug. 6), vacated a default judgment and $175 million in sanctions against Russia by applying new precedents clarifying the FSIA expropriation exception. Zhongshan Fucheng Industrial Investment Co. LTD v. Federal Republic of Nigeria, 2024 WL 3733341 (D.C. Cir. Aug. 9), discussed the application of the arbitration exception to the Foreign Sovereign Immunity Act ("FSIA") to public-law disputes involving the sovereign acts of governments.

The FSIA Framework

Foreign sovereign immunity in the United States is a legal doctrine that generally protects foreign governments from being sued in U.S. courts. This principle is primarily governed by the Foreign Sovereign Immunities Act (FSIA) of 1976. Under the FSIA, foreign states are presumptively immune from the jurisdiction of U.S. courts unless a specific exception applies. These exceptions include situations where the foreign state has waived its immunity, engaged in commercial activities that have a direct effect in the United States, or committed certain acts such as torture, extrajudicial killing, or property expropriation in violation of international law. The FSIA establishes a framework for determining when U.S. courts can hear cases involving foreign sovereigns, aiming to balance respect for the sovereignty of other nations with the need to provide a forum for certain legal claims.

Agudas Chasidei Chabad of United States v. Russian Federation

In a legal saga going back to 2004, petitioner in this case secured default judgment agains the Russian Federation. After the sovereign ignored the ruling, the Court ordered sanctions, now totaling more than $175 million. Unable to execute directly on the sovereign's assets, petitioner sought to collect from entities in the United States with connections to the Russian state, such as Tenex-USA, a third-tier subsidiary of the Russian State Atomic Energy Corporation, and State Development Corporation VEB.RF (VEB), a Russian state development bank. The D.C. Circuit's latest opinion in this matter is related to petitioner's attempt to execute on these entities' assets. Although the district court for the District of Columbia stopped petitioner's attempts to do so because it had failed to give the sovereign notice of the sanctions judgments, it held that "Chabad had satisfied the FSIA's expropriation exception as to the Russian Federation, so the Federation lacked immunity with respect to the judgments entered against it[, and] that, for the most part, Chabad had satisfied a separate FSIA exception to the immunity from attachment that the FSIA otherwise confers on foreign state property." Respondents appealed.

Chabad opposed the appeal on a jurisdictional basis, claiming that respondents (1) cannot appeal the decision in their favor (since the motion was denied in the lower court); (2) improperly "seek[] to appeal the district court's reasoning, rather than its judgment"; (3) lack standing to raise the issue of the Russian Federation's immunity; and (4) should wait until district court's proceedings have come to an end to appeal the denial without prejudice of its attachment motion. The Court rejected these arguments. Specifically as to (3), the Court explained that "a nonparty may challenge an order on sovereign-immunity grounds if the nonparty 'has an interest that is affected' by the order—as long as it does so through an appropriate procedural vehicle." As opposed to an earlier case where the Court did not allow respondents to challenge the Court's order on sovereign-immunity grounds through a Rule 60(b) motion as a non-party, here, the district court's order "plainly affects" respondents' interest in its United States property.

The Court then moves on to vacate all judgments against the Russian Federation and thus hold that petitioner cannot attach respondents' assets to satisfy these judgments. The Court's decision rested on its holding that the expropriation exception did not apply in this case because "[t]he expropriated property those claims involve ... sits in Russia, not the United States. And as we have now held several times, expropriated property must be located in the United States for jurisdiction to lie under the expropriation exception over claims against a foreign state." The district court had based its jurisdictional finding in part on the D.C. Circuit's Chabad I case, but the appellate court observed that Chabad I has since been superseded by two other precedential D.C. Circuit holdings. Those rulings clarified that the FSIA's exception requires the property at issue to be based in the United States, but that is not the scenario in this case, since expropriated property is located in Russia.

Zhongshan Fucheng Industrial Investment Co. LTD v. Federal Republic of Nigeria

The Zhongshan opinion involves the arbitration exception to the FSIA and an arbitration award against Nigeria of $55.6 million in compensation from Nigeria and $75,000 in moral damages, along with interest and legal and arbitral fees. After Zhongshan filed a petition to confirm the arbitration award in the District Court for the District of Columbia, Nigeria moved to dismiss for lack of subject-matter and personal jurisdiction. The district court denied Nigeria's motion to dismiss, holding that Nigeria was not immune because the Final Award was governed by the New York Convention, and so fell within the FSIA's arbitration exception.

The appellate court affirmed the denial of Nigeria's motion to dismiss, rejecting Nigeria's argument that the commercial reservation limits the New York Convention to arbitral awards arising from direct transactions between a signatory state and a private party.

The Court held that the award "satisfies the Convention's requirements that the arbitrated dispute (1) 'aris[e] out of a legal relationship' that is (2) 'considered as commercial[.]'" Specifically, "Zhongshan and Nigeria shared a legal relationship because Nigeria owed Zhongshan legal duties under the Investment Treaty" at issue in the arbitration. The Court explained that "China and Nigeria negotiated a treaty that was intended to confer specified benefits upon investors. The Investment Treaty expressly guarantees Chinese investors protection of their investments and fair and equal treatment. ... Underscoring the point, the duties owed to investors are distinct from those owed to the signatory states." As for the second component of the commercial reservation, the Court explains, "the legal relationship the Investment Treaty created between Zhongshan and Nigeria is commercial in nature. The relationship exists because Zhongshan made a commercial investment, in a free-trade zone designed to facilitate commerce, under a bilateral treaty aimed at promoting commercial investment and protecting commercial investors."

However, Nigeria argues that the commercial reservation limits the New York Convention to arbitral awards arising from direct transactions between a signatory state and a private party, relying principally on the Federal Arbitration Act's requirement that the parties’ relationship be “considered as commercial, including a transaction, contract, or agreement described in section 2 of this title[.]” Section 2 of the Federal Arbitration Act, in turn, provides that “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce” providing for arbitration “shall be valid, irrevocable, and enforceable[.]” Because the Investment Treaty itself is not a commercial transaction, and Zhongshan did not directly transact with Nigeria itself, Nigeria argues that the relationship between Zhongshan and Nigeria is not considered as commercial for purposes of the commercial reservation.

The Court rejected Nigeria's proposed reading, explaining that it "would artificially and extra-textually confine the commercial reservation to the scope of Section 2 of the Federal Arbitration Act," by replacing the commercial reservation's use of the word “including” with the words “limited to." The Court further explain that "nothing in this opinion suggests that the Investment Treaty is itself a commercial relationship. Instead, the Investment Treaty created a relationship between Nigeria and the commercial investor Zhongshan to promote commercial development. It is that relationship between Nigeria and Zhongshan that is considered as commercial."

Judge Katsas dissented, advancing the opinion that "[i]n its typical applications, the New York Convention governs awards arising from disputes between private parties. This case presents the question whether the Convention also governs awards arising from public-law disputes involving the sovereign acts of governments. In my view, the Convention's reference to “persons” does not extend to states acting in their sovereign capacity." The majority disagreed, explaining that "the Convention's drafters did not 'plainly' state an 'intent[ ]' to carve sovereign-act breaches against a private entity out of the New York Convention's scope and to categorically constrict the Convention's coverage to private acts."

The application of foreign sovereign immunity has significant implications for international relations and commerce. By limiting the circumstances under which foreign states can be sued, the FSIA helps to ensure that diplomatic and economic interactions between countries are not unduly disrupted by litigation. However, the exceptions to immunity recognize that there are instances where foreign states should be held accountable for their actions, especially when they engage in commercial activities or violate fundamental human rights. The U.S. courts have the challenging task of interpreting and applying these exceptions, often navigating complex questions of international law and foreign policy. As such, foreign sovereign immunity remains a critical and evolving area of law, reflecting the ongoing interplay between legal principles and the realities of global governance.

S.D.N.Y. Clarifies that U.S Courts Lack Jurisdiction to Vacate Foreign Awards

In  Molecular Dynamics, Ltd., SDBM Limited, & Chauncey Capital Corp. v. Spectrum Dynamics Medical Limited & Biosensors International Group Ltd., No. 22-5167, 2024 WL 3523414 (S.D.N.Y. July 23, 2024), the U.S. District Court for the Southern District of New York refused to vacate a Swiss arbitration award, finding that federal courts lack jurisdiction to vacate the award.

U.S. courts generally do not possess subject matter jurisdiction to vacate foreign arbitral awards. This principle is grounded in international arbitration law and practice, which typically confers the authority to annul or vacate an arbitral award on the courts of the country where the arbitration took place or under whose laws the arbitration was conducted. This approach aligns with the doctrine of territoriality in arbitration, ensuring that the legal framework and judicial oversight of the arbitration process are consistent with the local laws and procedures governing the arbitration.

The Molecular Dynamics court explained that under the New York Convention, a “competent authority” in a country under the laws of which the award is “made” “is said to have primary jurisdiction over the arbitration award," meaning that the state in which, or under the law of which, an award is made, will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief. Under the New York Convention, all other signatory states become secondary jurisdictions, where "parties can only contest whether that State should enforce the arbitral award." Thus, under the New York Convention, courts in countries with secondary jurisdiction may only decline to enforce an arbitral award, and do so based “only on the limited grounds specified in Article V [of the New York Convention].” This is implemented in the Federal Arbitration Act in Section 207.

The Southern District opened its analysis of respondents' argument that it lacks subject matter jurisdiction to vacate the award by recognizing that the Second Circuit has held in Zeiler v. Deitsch, 500 F.3d 157, 165 n.6 (2d Cir. 2007), that “[n]either the [New York] Convention nor its enabling statute, 9 U.S.C. §§ 201-08, grant[s vacatur] power with regard to [awards governed by the New York Convention].” The Seventh and Eleventh Circuits have similar holdings. The Court explained:

Under the New York Convention, only a “competent authority” of the country in which, or under the law of which, an award was made, may vacate or annul the award under domestic law. See N.Y. Conv., art. V(1)(e). Thus, while “courts of a primary jurisdiction may apply their own domestic law” — such as the FAA — “when evaluating an attempt to annul or set aside an arbitral award,” “courts in countries of secondary jurisdiction may refuse enforcement only on the limited grounds specified in Article V.”

The Court then found that Switzerland was the primary jurisdiction in this case because the Arbitration was seated in Switzerland and governed by Swiss law, both procedurally and substantively. The Court rejected petitioners' argument that the United States is the primary jurisdiction because the forum selection clause in an underlying agreement confers jurisdiction to vacate the Swiss awards in U.S. courts. That clause stated that "the seat of the [arbitration] shall be Geneva Switzerland,” and that “on matters concerning the [arbitration], the courts of New York, New York will have exclusive jurisdiction thereupon.” Nevertheless, the Court was not persuaded that this is a proper way to circumvent the New York Convention. Indeed, the Court found that this reading of the forum selection clause contravenes the New York Convention which reserves the power to vacate foreign awards to courts sitting in primary jurisdiction alone. The Court explained that it is not within the parties' power to "expand[] the powers of a court beyond the confines set by the New York Convention," "as there is a 'basic difference between the court's power and the litigant's convenience,' and no contract can convey to the court the 'power to adjudicate' matters which it otherwise could not."

The rationale behind limiting the jurisdiction to vacate arbitral awards to the courts of the seat of arbitration is to maintain coherence and predictability in the arbitration process. When parties choose a specific jurisdiction for arbitration, they implicitly accept the legal and procedural standards of that jurisdiction, including the grounds and procedures for challenging the award. Allowing U.S. courts to vacate foreign arbitral awards would create a risk of conflicting decisions and undermine the stability of the international arbitration system. Instead, U.S. courts focus on the recognition and enforcement of foreign arbitral awards under frameworks such as the New York Convention, which provides a uniform standard for enforcing awards while respecting the jurisdictional boundaries.

In practice, U.S. courts can refuse to enforce a foreign arbitral award on limited grounds, such as if the award violates public policy or if due process was not observed during the arbitration. However, these are exceptions rather than the norm, and they do not equate to a broad authority to vacate the award. By adhering to this jurisdictional limitation, U.S. courts contribute to the global predictability and reliability of the arbitration process, fostering an environment where international parties can resolve disputes with confidence that the agreed-upon legal framework will be respected and enforced.

Samsung Group Investor Moves to Confirm Arbitration Award Against Korea

Mason Capital L.P. and Mason Management LLC filed a petition to confirm a $30 million arbitration award against the Republic of Korea before the U.S. District Court for the District of Columbia on Friday, May 24, 2024. Petitioners also seek to confirm an award of more than $10 million in costs and fees related to the arbitration.

The arbitration arose out of Petitioners investments subject to the Free Trade Agreement between Korea and the United States (the "FTA"). Specifically, Petitioners acquired publicly traded shares in Samsung Electronics, Inc. and Samsung C&T. Petitioners allege that they acquired shares in SEC and SC&T, believing that incoming reform to Samsung’s corporate governance would unlock value for all Samsung shareholders, including Mason itself. However, in 2014, Samsung began to change its governance structure and the market speculated that it would transition to a holding company structure. This happened in May 2015, when Samsung announced that Cheil Industries Incorporated will merge with Samsung C&T. At the time, financial experts advised Samsung C&T stockholders to vote against the merger as it grossly undervalued the company and was solely aimed to allow Samsung Electronics, Inc.'s Vice Chairman to strengthen his control over Samsung under his family's succession plan while avoiding tax liabilities, the petition alleges. The merger was approved because Korea's National Pension Service, Samsung C&T's largest individual stockholder, voted in favor of the transaction despite the analysts' warnings. According to the petition, it was subsequently revealed during criminal proceedings in Korean courts that the President of Korea, Park Geun-hye, had financial interests in approving the merger and used his political influence to push for a vote in favor of the merger.

Petitioners initiated arbitration under the FTA, which concluded in their favor. The tribunal held that Korea breached the FTA in connection with the investments by Mason in Samsung and imposed on Korea obligations to pay Mason over $30 million in damages for losses, with interest, €630,000.00 in arbitration costs, with interest; and over $10 million in legal fees and expenses.

The case is Mason Capital L.P. et al. v. Republic of Korea, No. 24-cv-1551. Petitioners are represented by Abid R. Qureshi and Joseph V. Langkilde from Latham & Watkins LLP.

The petition can be downloaded below.

D.D.C. 24-cv-01551 dckt 000001_000 filed 2024-05-24.pdf

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