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.

Construction Co. Opposes Guatemala's Motion to Dismiss

On May 10, Sigma Constructores, S.A. ("Sigma"), a well-established construction and engineering company incorporated in Guatemala, opposed Guatemala's motion to dismiss its petition to confirm three awards totaling over $32 million. Sigma addressed six different arguments--or categories of arguments--advanced by the sovereign in its attempt to dismiss the petition to confirm the awards.

First, Sigma argued that the sovereign's arguments such as "(i) that Sigma’s claims in the Arbitrations were time-barred; (ii) that Guatemalan law prevents Respondent from paying the amounts due in U.S. dollars, or (iii) that payment of the Awards would otherwise violate Guatemalan law" are impermissible attempts by Guatemala for a second bite at the apple, as they have been considered--and rejected--by the competent arbitral tribunals, as well as Guatemalan courts, that confirmed the three awards. Petitioner explained that these arguments are not jurisdictional and thus improperly raised in a Rule 12(b)(6) motion. Petitioner further argued that these arguments should be precluded under a long line of precedent that bars award debtors from re-litigating substantive issues during a confirmation proceeding.

Second, Sigma used Guatemala's counsel own words during a status conference to reject an argument that the awards were made against Guatemalan Ministry of Communications, and not the state itself. Petitioner not only pointed out that the Ministry was not a party to the contracts underlying the arbitrations, nor to the arbitration itself, but also quoted Guatemala's counsel who conceded during a status conference that the Ministry "does not have a separate legal personality" under Guatemalan law.

Third, Sigma rebuffed Guatemala's attempt to apply the Panama Convention instead of the New York Convention to its request to confirm the awards because the awards are purely domestic. Nevertheless, the petitioner pointed out that it has satisfied the pleading requirements for recognition under the Panama Convention as well.

Fourth, Sigma asked the Court to reject the "comity" arguments set forth by the sovereign as premature and factual.

Fifth, petitioner explained that Guatemala's forum non conveniens arguments should be rejected because the D.C. Circuit held that the doctrine is inapplicable in arbitration award confirmation proceedings.

Lastly, petitioner asked the Court to deny the sovereign's request for a stay of the confirmation proceedings, as all the ancillary litigation launched by Respondent to collaterally attack the judgments confirming two of the awards have been finally decided in Sigma’s favor. Moreover, the remaining award has been confirmed and Respondent’s efforts to stay its enforcement have been consistently rejected by Guatemalan courts.

The case is Sigma Constructores, S.A. v. Republic of Guatemala, C.A. No. 1:22-cv-01674-TSC (D.D.C.). Jonathan Cross and Daniela Paez of Herbert Smith Freehills N.Y. LLP represent petitioner. Guatemala was represented by Greenberg Traurig in moving to dismiss, but the firm withdrew its appearance earlier this month after presidential elections in Guatemala resulted in a change of regime and, as Greenberg Traurig explained, "effectively, a new client." According to the motion to withdraw, Guatemala is actively looking for a new firm to take Greenberg Traurig's place. Guatemala's reply is due on May 30, 2024.

Hulley Opposes Russia's Appeal

Appellees Hulley Enterprises Ltd., Yukos Universal Ltd., and Veteran Petroleum Ltd. filed their brief in opposition to Russia's appeal last week. Appellees, represented by Susman Godfrey LLP, focused their response on the fact that Russia's arbitrability argument has been rejected repeatedly in the course of the sovereign's various attempts at annulling or vacating the award. Appellees implored the Court: "This case cries out for the doctrine of issue preclusion to be applied."

Appellees argued that since the case was stayed for six years to wait for the annulment proceedings before Dutch courts to come to an end, allowing Russia to re-litigate these issues would "defeat the central purpose of the New York Convention—facilitating the expeditious resolution of disputes."

Even if the Court were to give Russia another bite at the apple, Appellees argue, the District Court correctly denied the Russian Federation’s motion to dismiss under the Foreign Sovereign Immunities Act (“FSIA”). Appellees explained that Russia's agreement to provisionally apply the ECT was sufficient for the District Court to find that an agreement to arbitrate existed. Appellees further argued that since the sovereign is not challenging the existence of the agreement, but its validity, Russia's challenges are questions of arbitrability, which are not jurisdictional questions under the FSIA.

Russia's opening brief, in April, is an appeal of the District Court's decision denying its request to dismiss the action to enforce an arbitral award against it, claiming that it has never waived its immunity against jurisdiction. Russia now argues that the Court erred in refusing to dismiss the action because (1) it has not delegated the arbitrability review to the tribunal; and (2) even if it did, the District Court still had the obligation to independently decide "whether Respondent made a 'standing offer' to arbitrate under the [Energy Charter Treaty ("ECT")] and whether Petitioners were eligible offerees who could 'accept[]' any purported offer."

The case is Hulley Enterprises Ltd. v. Russian Federation, No. 23-7174 (D.C. Cir.). Russia's reply brief is due on May 22, 2024.