2006 International Law Update, Volume 12, Number 5 (May)

2006 International Law Update, Volume 12, Number 5 (May)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.                                 

ANTI-SUIT INJUNCTION

Ninth Circuit enjoins Ecuadorian litigation where it violates U.S. forum selection clause of underlying private contract between private companies, where foreign litigation is vexatious and where injunction would not transgress international comity

In 1978, E.& J. Gallo Winery (Gallo) (plaintiff), a large California winery, entered into an exclusive distributorship agreement with the predecessor of Andina Licores S.A. (defendant) (an Ecuadorian company). In 1987, plaintiff and defendant signed an updated agreement. Both the original and the updated agreement provided that California would be the forum for any litigation.

Despite many years of cooperation, the relationship took a bizarre turn in 2004 over allegedly late shipments and exclusivity. Defendant filed a proceeding before the Sixth Civil Court in Guayaquil, claiming to know nothing about plaintiff’s whereabouts. As a result, defendant asked the court to appoint a guardian (curador) selected by defendant to represent plaintiff. As if that were not strange enough, defendant’s choice of a curador for plaintiff was Rita Yepez, a recently admitted attorney, whose legal qualifications were certified by a day laborer and a student.

Defendant then filed suit against plaintiff in the Second Civil Court of Guayaquil, alleging a violation of Decree 1038-A. That Decree limited discovery to six business days (September 10 to September 17, 2004). Issued during the Ecuadorian military dictatorship in 1976, a later regime repealed it in 1997 as contrary to World Trade Organization rules. The curador notified plaintiff of this proceeding by mail, but plaintiff apparently did not get that letter until September 16, 2004. Plaintiff then retained an attorney who turned out to be ineffectual (a) in informing the court about the California forum selection clause, and (b) in introducing additional evidence.

In October 2004, plaintiff brought its own action against defendant in California state court. Defendant removed that action to federal court, and moved to dismiss for lack of personal jurisdiction. Plaintiff then sought a preliminary injunction to prevent defendant from pursuing its action in Ecuador (which is the issue here). Meanwhile, “a dizzying array or (sic) judgments, appeals, and procedural motions continued in Ecuador.” [Slip op. 4]

The district court denied plaintiff’s request for the preliminary injunction, largely on international comity considerations, and plaintiff appealed. The U.S. Court of Appeals for the Ninth Circuit reverses and remands with instructions to grant the preliminary injunction.

The Court points out that it had last examined the standard for granting an “anti-suit injunction” in Seattle Totems Hockey Club, Inc. v. Nat’l Hockey League, 652 F.2d 852, 855 (9th Cir. 1981). It then declared: “‘A federal district court with jurisdiction over the parties has the power to enjoin them from proceeding with an action in the courts of a foreign country, although the power should be used sparingly. The issue is not one of jurisdiction, but one of comity. ...”

“We cited the Fifth Circuit’s standard in In re Unterweser Reederei GmbH, 428 F.2d 888, 896 (5th Cir. 1970), aff’d on reh. en banc, 446 F.2d 907 (1971), rev'd on other gds. sub nom. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), as instructive: ‘foreign litigation may be enjoined when it would (1) frustrate a policy of the forum issuing the injunction; (2) be vexatious or oppressive; (3) threaten the issuing court’s in rem or quasi in rem jurisdiction; or (4) where the proceedings prejudice other equitable considerations.’” [Slip op. 6]

Seattle Totems, however, left many questions unanswered, especially as far as international comity is concerned. The Court now turns to those issues. “The suitability of an anti-suit injunction involves different considerations from the suitability of other preliminary injunctions. An anti-suit injunction, by its nature, will involve detailed analysis of international comity. Often, as here, the injunction will be defensive in nature. [Plaintiff] has requested the preliminary injunction because of [defendant’s] potentially prejudicial, vexatious and oppressive proceedings in Ecuador.”

“But should [plaintiff] also need to prove a likelihood of success on the merits of the breach of contract claim in order to receive an anti-suit injunction? That is, does our usual test for a preliminary injunction apply, or is a modified analysis required for anti-suit injunctions? While our cases are not clear on this issue, we conclude that the more appropriate approach is that enunciated by the Fifth Circuit: ‘To the extent the traditional preliminary injunction test is appropriate, . . . we only need address whether [the injunction seeker] showed a significant likelihood of success on the merits. The merits in this case, however, are . . . about . . . whether [the injunction seeker] has demonstrated that the factors specific to an antisuit injunction weigh in favor of granting that injunction here." Karaha Bodas Co. L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F.3d 357, 364 n.19 (5th Cir. 2003).” See related case at 2003 International Law Update 37.

“Thus, we hold that [plaintiff] need not meet our usual test of a likelihood of success on the merits of the underlying claim to obtain an anti-suit injunction against [defendant] to halt the Ecuadorian proceedings. Rather, [plaintiff] need only demonstrate that the factors specific to an anti-suit injunction weigh in favor of granting the injunction. For purposes of this action, we may rely on any of the Unterweser factors if it applies to the case and if the impact on comity is tolerable. This test, we conclude, is consistent with Seattle Totems.” [Slip op. 7]

The first step in determining whether an anti-suit injunction is appropriate is whether the parties and issues are the same, and whether the domestic action disposes of the foreign action. Here, the district court erred in concluding that the claims were not the same. Defendant sued in Ecuador for breach of contract. In the U.S., plaintiff sought a declaration that it did not breach the same contract. Therefore, the parties and the claims are essentially the same.

Another Seattle Totems factor is that a U. S. court may enjoin foreign litigation when it would frustrate a policy of the forum issuing the injunction. Here [plaintiff] claims that the injunction would enforce a forum selection clause which the parties had agreed on. Moreover, [defendant] failed to give any reason for setting aside the forum selection clause. [Plaintiff] can enforce the clause only by means of an anti-suit injunction. Therefore, [defendant’s] litigation in Ecuador to set aside the forum selection clause does frustrate a policy of the U. S.

Lastly the Court turns to the issue of international comity. “That [defendant] filed first ... makes no difference as to the propriety of an anti-suit injunction. In a situation like this one, where private parties have previously agreed to litigate their disputes in a certain forum, one party’s filing first in a different forum would not implicate comity at all. No public international issue is raised in this case. There is no indication that the government of Ecuador is involved in the litigation.”

“[Defendant] is a private party in a contractual dispute with [plaintiff] another private party. The case before us deals with enforcing a contract and giving effect to substantive rights. This in no way breaches norms of comity. Under the lower court’s reasoning, any party seeking to evade the enforcement of an otherwise-valid forum selection clause need only rush to another forum and file suit. Not only would this approach vitiate United States policy favoring the enforcement of forum selection clauses, but it could also have serious deleterious effects for international comity.” [Slip op. 11]

The Court concedes that there are different views in the Circuits as to the relative importance of comity when deciding anti-suit injunctions. This case, however, would likely meet any of those tests. Therefore, the anti-suit injunction should issue.

Citation: E. & J. Gallo Winery v. Andina Licores S.A., No. 05-16504 (9th Cir. May 1, 2006).

ARBITRATION

Fifth Circuit holds foreign government liable for arbitration award, even though it acted through its subsidiary where government exercised complete control over subsidiary and where it was using subsidiary to perpetrate fraud or injustice

In 1993, Bridas (plaintiff), an Argentine Corporation, entered into a 25-year Joint Venture Agreement (JVA) to exploit oil and gas resources with an entity designated by the Government of Turkmenistan (defendant). Recently liberated from the Soviet Union, defendant lacks the technical expertise to extract its vast resources. The JVA secured plaintiff an unlimited export license for developing hydrocarbons. (These are organic chemicals associated with oil, natural gas and coal.) It allocated all hydrocarbon production up to November 1992 levels to the Turkmenian party; the parties were to split any later increases in production.

To raise its share of future proceeds, the defendant ordered plaintiff to halt operations in November of 1995 and to stop importing items into, and exporting hydrocarbons from, Turkmenistan. Six months later, plaintiff began arbitration proceedings in Texas.

The defendant next replaced the Turkmenian party as signatory to the JVA with an entity it called “Turkmenneft.” It also set up a special State Oil and Gas Development Fund (SOGDF) to hold the proceeds from all oil and gas exports, declaring the SOGDF assets immune from seizure.

The proceedings took place in Houston before an arbitration panel of the International Chamber of Commerce. The panel’s main issue was whether it could hold the defendant liable though it had never signed the JVA. The panel held both Turkmenneft and defendant liable for repudiation of contract and in 2001 handed down a $495 million damage award.

A Texas federal court initially upheld the award against the defendant based on agency and estoppel. On appeal, the Fifth Circuit considered several theories which can bind a non-signatory to an arbitration agreement: i.e., agency, alter ego, estoppel, and third-party beneficiary. Finding the other theories inapplicable, the Court remanded the case for a determination solely on the theory of alter ego.

On remand, the district court vacated the arbitration award on grounds that the defendant did not constitute Turkmenneft’s alter ego. Plaintiff duly took an appeal. The Fifth Circuit now reverses and remands, holding that the JVA binds the defendant as an alter ego of the signatory, Turkmenneft.

The Court begins its analysis by noting that generally, “a parent corporation ¼ is not liable for actions taken by its subsidiaries, including entities owned by foreign governments.” [Slip op. 20] The Court then recognizes an exception to this general immunity. The alter ego principle as a form of the “piercing the corporate veil” doctrine, renders a parent liable when it uses its subsidiary as a “sham to perpetrate a fraud.” [Slip op. 3]

The Court lays out the two key elements of the alter ego doctrine: “(1) the owner exercised complete control over the corporation with respect to the transaction at issue and (2) such control was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” [Slip op. 3]

First, the Court analyzes the fraud prong of this test, placing the burden of proving that the defendant misused the subsidiary to commit fraud or injustice on the plaintiff. Plaintiff can satisfy this burden by evidence that the defendant had injured it by destroying the value of the JVA.

The defendant assigned Turkmenneft as the new party to the JVA, requiring it to arbitrate disputes and making it liable for all possible adverse awards. Defendant purported to make Turkmenneft immune from seizure, however, because it got its funding from the newly created SOGDF. The Court concludes that these and other actions by the defendant aimed at preventing plaintiff from recovering any substantial damage award, and thus satisfy the “fraud or injustice” prong of the test.

Second, the Court analyzes whether the defendant had enough control over Turkmenneft. The district court used twenty-one private and public law factors to aid in its determination and concluded that the Government did not exercise the necessary control.

The relevant “private law” factors considered in Bridas S.A.P.I.C. v. Government of Turkmenistan ("Bridas I"), 345 F.3d 347 (5th Cir. 2003) were whether: “(1) the parent and subsidiary have common stock ownership; (2) the parent and subsidiary have common directors or officers; (3) the parent and subsidiary have common business departments; (4) the parent and subsidiary file consolidated financial statements; (5) the parent finances the subsidiary; (6) the parent caused the incorporation of the subsidiary; (7) the subsidiary operated with grossly inadequate capital; (8) the parent pays salaries and other expenses of subsidiary; (9) the subsidiary receives no business except that given by the parent; (10) the parent uses the subsidiary's property as its own; (11) the daily operations of the two corporations are not kept separate; (12) the subsidiary does not observe corporate formalities.” [Slip op. 4]

The district court also considered three additional “private law” factors: "(1) whether the directors of the 'subsidiary' act in the primary and independent interest of the 'parent'; (2) whether others pay or guarantee debts of the dominated corporation; and (3) whether the alleged dominator deals with the dominated corporation at arm's length.” [Slip op. 4-5]

The relevant “public law” factors considered by the Bridas I court were: “(1) whether state statutes and case law view the entity as an arm of the state; (2) the source of the entity's funding; (3) the entity's degree of local autonomy; (4) whether the entity is concerned primarily with local, as opposed to statewide, problems; (5) whether the entity has the authority to sue and be sued in its own name; and (6) whether the entity has the right to hold and use property.” [Slip op. 5]

The Fifth Circuit sees clear error in the district court’s application of the alter ego factors. The alter ego analysis must examine – not so much the form of the relationship – as its realities; it demands a focus on the actual conduct of the parent towards its subsidiary. The district court went wrong because it glorified form over substance.

The district court first balanced the “formalities” and “operational” factors, finding that Turkmenneft existed as a separate and independent entity. Then the district court contradicted itself by stating that the defendant did not deal with Turkmenneft at arm’s length, but instead as a “closely held subsidiary.” [Slip op. 6] Furthermore, in reviewing the “finance” factors, the district court unearthed more indicia of Turkmenneft’s dependence on the defendant.

The Fifth Circuit determines that, in combination, these factors satisfy the “control” prong. The court noted that “undercapitalization is often critical in alter ego analysis¼the fact that a subsidiary maintains what amounts to a ‘zero balance,’ and relies exclusively upon another entity to service its debts, is strong evidence that the subsidiary lacks an independent identity.” See HystroProds., Inc. v. MNP Corp., 18 F.3d 1384, 1389 (7th Cir. 1994). [Slip op. 6]

After the defendant forced the plaintiff out of the JVA through export bans, it used its power over Turkmenneft in an effort to deprive plaintiff of any contractual remedies. “Intentionally bleeding a subsidiary to thwart creditors is a classic ground for piercing the corporate veil.” [Slip op. 7] Although plaintiff did satisfy the alter ego test in the instant case, the Court stresses that the test should be stringent where a creditor had an opportunity to seek a guarantee of the subsidiary from the parent.

Citation: Bridas S.A.P.I.C. v. Government of Turkmenistan, No. 04-20842 (5th Cir. April 21, 2006).

ATTORNEY AND CLIENT

Alberta Court of Appeal rules that attorney who had fiduciary duties to multiple parties in setting up ostrich farm with birds from U.S. had committed malpractice when he entered into transactions for some clients without notifying all others

In 1993, Antony Finch (plaintiff) entered into a business arrangement with the two Zelman brothers, Randy and Scott, to buy and operate an ostrich farm to be called the Alberta Ostrich Farm (AOF). They asked for a loan from the Drumheller Regional Business Development Center (DRBDC), where attorney William A. Herman (defendant) was a director. Plaintiff located some land and he and the Zelman brothers retained defendant to represent them in the land purchase. Defendant knew the Zelmans needed financing and that plaintiff did not want to go ahead with the deal without the loan funds.

As of the time DRBDC sent the instructions, defendant acquired a total of four clients: plaintiff, the Zelman brothers and the DRBDC. At no time did defendant advise plaintiff that there might be a conflict of interest arising from the retainer by plaintiff and the Zelman brothers as well as by plaintiff and the DRBDC. Defendant also neglected to notify plaintiff that defendant was a director of the DRBDC. Under the law, defendant received the proceeds of the loan in trust for plaintiff and the Zelman brothers.

At the direction of the Zelman brothers, and without advising or seeking instructions from plaintiff, defendant released $ 50,000 of the loan to a Mr. Starkey in the United States to buy two ostriches. The U.S. ostriches were then sold to the Zelman brothers’ father, Dennis, who was not even a party to the loan agreement. The actions of the Zelmans and defendant wrecked the plan for plaintiff’s ostrich farm. No one repaid the loan to DRBDC which had two of the ostriches seized. An arbitrator called for the seizure of more birds and for the sale of the land which did yield a small profit; the arbitrator directed the payment of the net proceeds to the DRBDC.

Plaintiff Finch sued the defendant and his law firm for negligence, breach of contract and breach of fiduciary duty. The trial judge found that defendant was acting for plaintiff and the Zelman brothers in connection with the receipt of the loan funds, and that he owed fiduciary duties to all three. He determined that defendant had breached his fiduciary duties to plaintiff by failing to disclose his actions on behalf of the Zelman brothers, thus depriving plaintiff of the option of withdrawing from the business arrangement before DRBDC had advanced the loan funds.

The trial judge also held that defendant had violated his fiduciary duties by failing to represent plaintiff with undivided loyalty and by neglecting to fully disclose all material information to plaintiff. The trial judge awarded plaintiff $ 60,000, representing the value of plaintiff’s ostriches in June 1993. Defendant appealed to the Alberta Court of Appeal in Calgary. That Court dismisses the appeal.

In the challenged factual findings below, the Court saw no error. “The evidence supports the trial judge’s conclusion that [plaintiff] was Herman’s client with respect to the loan transaction. Although the trial judge found that Herman knew that a partnership existed, whether [plaintiff] was a client as an individual or as a partner is not determinative. On either basis, Herman owed fiduciary duties to [plaintiff]. The law is clear that a solicitor owes fiduciary duties to all members of a partnership, and solicitors are obliged to make full disclosure to all parties where they act for more than one party on the same side of a transaction.” [¶¶ 14-15].

The appellants also contended that they did not use the loan proceeds for the Zelman brothers’ personal benefit, but rather for the AOF. The Court, however, is not persuaded. “The evidence is clear that the loan proceeds were used to purchase the American ostriches for Dennis Zelman (the father), who in turn transferred them to the Zelman brothers, rather than to the AOF. Whether the Zelman brothers actually misused the loan proceeds may be relevant in other legal proceedings, but it is not relevant to the issue of whether Herman breached his fiduciary duties to [plaintiff].” [¶¶ 18-19]

The appellants further maintained that the plaintiff would have lost his ostriches in any event, regardless of the breach. The Court sees no merit in this point. “However, where a fiduciary is in breach of duty, he or she may not avoid liability by demonstrating that the loss would have occurred in any event. [Cites]. Inevitability of loss is irrelevant in determining liability for a breach of fiduciary duty.”

“In any case, a close examination of the dates supports the finding of the trial judge that, at the date that Herman sent the money to [the mysterious] Starkey without advising or receiving instructions from Finch, the agreement for sale had not been signed and Finch’s ostriches had not been registered with the Personal Property Register. Had Finch known about the disbursement of the loan proceeds, he could have taken action to protect his financial position.” [¶¶ 23, 24]

“The duty of full disclosure is a hallmark of a fiduciary relationship, and Herman breached this duty when he failed to advise [plaintiff] that he was a director of the DRBDC and that he was having separate discussions and receiving instructions from the Zelman brothers. Herman also owed [plaintiff] a duty of loyalty that he breached in disbursing the loan monies as he did. Herman’s argument that he owed no duty to [plaintiff] because the relationship was one of contract has no merit. We find no error in the trial judge’s conclusion that the appellants owed Finch fiduciary duties and breached them.” [¶¶ 30, 31].

Finally, the Court addresses the issue of causality. “[Unlike the common law,] it is clear that the proper approach to determining damages for breach of fiduciary duty is restitutionary; remoteness of damage is generally not a relevant consideration. When [plaintiff] began his relationship with Herman, he owned three ostriches he was prepared to commit to the AOF. When the monies were disbursed by Herman in breach of his fiduciary duties, a series of events followed involving the deposit on the land purchase, and demands of DRBDC that resulted in [plaintiff] losing his three ostriches.”

“The trial judge committed no error in finding that the loss of the three ostriches was caused by Herman’s breach of fiduciary duties. There is a sufficient causal link between [plaintiff’s] loss and Herman’s fiduciary breaches. Thus, the trial judge did not err in holding Herman liable for [plaintiff’s] loss, nor did he err in setting damages as the value of the ostriches in June of 1993.” [¶¶ 34, 35]

Citation: Finch v. Ross, Todd & Co., [2006] A. J. No. 352; 2006 AB.C.A. 98 (March 31, 2006).

CHOICE OF LAW

Applying choice-of-law principles of Restatement Second and governmental interest analysis in admiralty contract case, Eleventh Circuit rules that district court erred in applying United States law rather than law of Greece

Dresdner Bank AG in Hamburg, Kreditandstalt fuer Wiederaufbau, and Norddeutsche Landesbank‑Girozentrale (the Banks) filed a complaint in a Florida federal court in rem against the M/V OLYMPIA VOYAGER a 157.90 meter Blohm Voss GmbH motor vessel, Hull No. 961, her engines, tackle equipment, rigging, dinghies, furniture, appurtenances, etc., (the Vessel), a Greek‑flagged passenger cruise vessel, to foreclose a preferred ship mortgage on a foreign vessel. The Banks also filed an in personam suit against Olympic World Cruises (OWC), the Vessel’s owner.

The district court entered a default judgment of foreclosure against the Vessel and ordered it sold. The court also signed an order to require the Banks to provide security for any claims found to be superior in priority to the preferred ship mortgage. Many parties later filed claims or motions to intervene to assert claims against the Vessel or the proceeds of its sale. In response, the court allowed the Banks to stand in the shoes of the Vessel to defend against all claimants asserting priority in claims.

Aktina Travel, S.A. (Aktina) is a Greek travel agency, which orally contracted with the operators of the Vessel to provide airline tickets for its crew members. They would use the tickets to travel to and from the United States, either before boarding or after disembarking the Vessel. The parties entered into the agreement in Greece, and Aktina provided the travel arrangements from Greece by telephone and other electronic means.

Having successfully moved to intervene in this action, Aktina claimed that it was entitled to a maritime lien under the Commercial Instruments and Maritime Liens Act (CIMLA), 46 U.S.C. Section 31301 et seq. CIMLA grants priority to creditors holding maritime liens for necessaries provided in the U.S. over those holding preferred mortgages on foreign vessels. See 46 U.S.C. Section 31326.

The court first determined that a conflict existed between U.S. law, which would afford Aktina a maritime lien, and Greek law, which would not. After doing a choice-of-law analysis, the court applied U. S. rather than Greek law. The court essentially rested this ruling on two factual findings: (1) that the U.S. was the place of contract performance and (2) that the subject matter of the contract consisted of airline tickets located in the U.S.

On January 13, 2005, the court entered a final judgment in favor of Aktina on its claim against the Vessel. The court found that Aktina was entitled to a maritime lien under CIMLA, and that this lien prevailed over the Banks’ preferred ship mortgage. The court fixed the dollar amount of the lien at $146,787.52. The Banks noted an appeal. The U.S. Court of Appeal for the Eleventh Circuit reverses and remands.

Since the lower court correctly noted the conflict between U.S. and Greek law, the Circuit Court focuses on which law to apply here. “Generally, to determine which law to apply in an admiralty [tort] case, courts examine several factors, as outlined in Lauritzen v. Larsen, 345 U.S. 571, 583‑92 (1953), and Romero v. Int'l Terminal Operating Co., 358 U.S. 354, 382 (1959). These factors include: (1) the situs of the claim; (2) the law of the flag of the vessel; (3) the allegiance of the seamen; (4) the allegiance of the shipowner; (5) the place of the contract; (6) the access to a foreign forum; and (7) the law of the forum making the choice of law. In Hellenic Lines Ltd. v. Rhoditis, 398 U.S. 306, 309 (1970), the Supreme Court added the additional factor of the shipowner’s base of operations.”

The Supreme Court, however, has not yet specifically adopted a choice-of-law approach in maritime contract cases. “Like the district court, we think that the Fifth Circuit’s opinion in Gulf Trading & Transport Co. v. The Vessel Hoegh Shield, 658 F.2d 363, 366‑ 68 (5th Cir.1981) (Unit A), provides the proper analysis for choice‑of‑law problems in maritime contract cases like this one, and we adopt it today as this circuit’s approach.”

“In Hoegh Shield, the Fifth Circuit distinguished Lauritzen and applied the Second Restatement of Conflicts of Law, Sections 6 (Choice‑of‑Law Principles) and 188 (Validity of Contracts and Rights Created Thereby), as well as governmental interest analysis, to hold that the proper choice of law in the contract dispute before it was the United States.”

“To conduct a choice‑of‑law analysis based on the Restatement, the court must determine which sovereign entity has the ‘most significant relationship’ with the transaction at issue. [Cite]. Section 6 of the Restatement outlines several general principles to be considered when making this determination. For a contract dispute such as this one, however, the Restatement provides more specific factors in Section 188 to effectuate the general choice‑of‑law principles outlined in Section 6. See Restatement (Second) Conflicts of Law Section 188(2). These factors are: (a) the place of contracting; (b) the place of negotiation; (c) the place of performance; (d) the locus of the subject matter of the contract; and (e) the domicile of the parties.” [Slip op. 3]

“Here, the district court found that both the place of contracting (factor (a)), and the place of negotiation (factor (b)) were Greece, and this finding is not challenged on appeal. In addition, factor (e), the domicile of the parties, also points to Greek law because the domicile of Aktina is Greece, the domicile of OWC, the owner of the Vessel, is Liberia, and the domicile of the sole shareholder of OWC, Royal Olympic Cruises, is Greece. The Vessel also flew a Greek flag. None of these facts are in dispute, probably because the district court placed little importance on them. Instead, the court found that the most important factors were (c), the place of performance, and (d), the locus of the subject matter of the contract.”

“As to the place of performance, the district court concluded that the services were ‘for the physical transport of crew members to and from the United States.’ This factual conclusion is clearly erroneous, and it is the principal conclusion upon which the district court’s ruling rests. The services provided by Aktina did not include the physical transport of any crew members. Aktina is not an airline ‑ it is a travel agent. The service that it provided was the purchasing of plane tickets. This service was entirely performed in Greece.”

“And, the district court left out of its analysis other important aspects of performance, such as payment and breach. Aktina invoiced the cost of the tickets to OWC in Greece. OWC was to pay the invoices in euro, and OWC breached the contract in Greece by not paying the invoices. Thus, these aspects of performance bolster the conclusion that the place of performance was Greece.”

“The district court’s conclusion based on factor (d), the locus of the subject matter of the contract, is also questionable. The court characterized the subject matter of the contract as tickets, and said that these tickets were uniformly located in the United States. But it is clear from the record that roughly half of the tickets were not picked up in the United States, but in airports around the world ‑‑ primarily in Greece. This is because roughly half of the arrangements were made to ensure that crew members could travel to the United States and make arrangements on their own to join the Vessel there.”

“The district court correctly found that each of the tickets was in the United States either at the beginning of a flight or at the end of it, but each ticket was also in another country ‑‑ most often Greece ‑‑ at the other end of each flight. To conclude, then, that the locus of the subject matter of the contract was solely the United States was erroneous.”

“Once this error and the erroneous factual determination that the place of performance was the United States are corrected, the Section 188 factors point overwhelmingly to Greece. And, the Restatement states that, when one state is both the place of negotiation and the place of performance of a contract, that state’s law should usually govern the contract. Restatement (Second) Conflicts of Law Section 188(3). In this case, Greece was both the place of negotiation and the place of performance, and in the absence of other significant factors pointing toward United States law, Greece’s law should apply.” [Slip op. 4].

“Section 6 of the Second Restatement of Conflicts of Law contains the general factors that courts should consider in any choice‑of‑law analysis. The parties have not briefed the application of these factors, and the district court did not rely on them. However, we briefly review them to determine whether they establish that the United States has a more significant relationship than Greece to the transaction at issue, despite our conclusion based on the Section 188 factors.”

“The Section 6 factors are: (a) the needs of the international system; (b) the relevant policies of the forum (here, CIMLA); (c) the relevant policies of other interested states (here, Greece’s maritime law that does not provide maritime liens for necessaries); (d) the protection of justified expectations; (e) the policy underlying the field of law in question; (f) the interest in predictability and uniformity; and (g) the ease in determining and applying the relevant law.”

“Of these factors, three ‑‑ (a), (e), and (f) ‑‑ do not favor either nation’s laws. Two ‑‑ (b) and (g) ‑‑ favor the application of United States law. The remaining two ‑‑ (c) and (d) ‑‑ favor the application of Greek law. Thus, after reviewing the Section 6 factors, we conclude that they do not establish that the United States has a more significant relationship than Greece to the transaction at issue here.”

“In this case, as with the Section 6 Restatement factors, the parties have not argued that governmental interest analysis resolves the choice‑of‑law issue, and the district court did not conduct a governmental interest analysis. Nevertheless, consistent with Hoegh Shield, we review the competing interests of the United States and Greece as to the application of their laws to this transaction. We conclude from this review that Greece’s interests outweigh those of the United States.”

“The United States has an interest in ensuring that United States suppliers, and those supplying goods and services to ships in United States ports, are protected from the defaults of vessels after receiving their supplies or services. CIMLA supports this policy. However, similar to the United States’s interest as to maritime transactions in its territory, Greece has a strong interest in ensuring that those who negotiate contracts in Greece will receive the benefit of their bargains. Greece also has an interest in determining the proper protections and priorities for Greek corporations and foreign vessel operators when they deal with each other.”

“To apply United States law to what is almost completely a Greek transaction would violate Greece’s interests in governing transactions within its borders, while it would do little to serve the United States’s interests under CIMLA. Thus, governmental interest analysis favors the application of Greek law.”

“[W]e hold that Greek law is the proper law to apply to the transaction between Aktina and the Vessel. The district court erred in applying United States law.”[Slip op. 5]

“Once the proper choice of law is made, it becomes clear that Aktina is not entitled to a maritime lien superior to the Banks’ preferred mortgage lien. No provision of Greek law provides for such a lien. Greek law establishes a statutory lien system, but statutory lien rights do not carry priority over preferred ship mortgages on foreign vessels. See 46 U.S.C. Section 31326. ... Accordingly, we reverse the district court’s judgment as to Aktina and remand for entry of judgment in favor of the Banks on Aktina’s claim.” [Slip op. 6].

Citation: Dresdner Bank AG v. M/V OLYMPIA VOYAGER, 2006 WL 1133879 (11th Cir. May 1, 2006).

FORUM NON CONVENIENS

Second Circuit reverses dismissal of property dispute for trial in Egypt on grounds of forum non conveniens and international comity holding that modest involvement of foreign law does not warrant dismissal where Canadian plaintiffs’ choice of U.S. forum is substantially justifiable

The Bigios (plaintiffs), a Jewish family, possessed large commercial holdings in Egypt, including a bottling plant, which the Nasser regime wrongfully seized. Thereafter the plaintiffs fled to Canada. After Nasser died, the Egyptian government ordered the property returned. The state-owned entity holding the property, however, refused and sold the bottling plant to a joint venture in which Coca-Cola (defendant) bought a substantial interest. Coca-Cola rejected the plaintiffs’ claims to ownership.

After an unsuccessful attempt to obtain relief in the Egyptian courts, the plaintiffs sued Coca-Cola in New York federal court. When this case first came before the Second Circuit, it saw no merit in plaintiffs’ claims under the Alien Tort Claims Act, but remanded the common law claims. It also held the “Act-of-State” doctrine inapplicable, since the issues do not negatively impact international relations. See Bigio v. Coca-Cola Co., 239 F.3d 440 (2d Cir. 2000). See 2000 International Law Update 188.

On remand, the district court dismissed plaintiffs’ claims on the grounds of international comity and forum non conveniens. Plaintiffs again took an appeal. The Second Circuit now reverses and remands.

The Circuit Court first rules that the district court had applied the wrong legal standard in dismissing the plaintiffs’ claims on international comity grounds. The Court explains that international comity may involve two distinct doctrines: first “as a cannon [sic] of construction, it might shorten the reach of a statute; second, it may be viewed as a discretionary act of deference by a national court to decline to exercise jurisdiction in a case properly adjudicated in a foreign state, the so-called comity among courts.” See In re Maxwell Comm. Corp. 93 F.3d 1036, 1047 (2d Cir. 1996).” [Slip op. 3]

Here, the lower court had mistakenly applied the test used to determine whether a court should apply a U.S. statute extraterritorially. The international comity issue raised in the instant case , however, is whether adjudication of the issues before U.S. courts “would offend ‘amicable working relationships’ with Egypt.” [Slip op. 2]

This common law suit for damages involves Canadian plaintiffs and a U.S. corporate defendant and requires a minimal application of Egyptian law. Since the Egyptian government has never voiced any objections, “resolution of this case by United States courts will ‘not likely impact on international relations’ with Egypt.” [Slip op. 3] Litigants regularly call upon U.S. courts to interpret foreign law and they usually do so without infracting principles of international comity.

The Circuit Court then evaluates the district court’s dismissal under the forum non conveniens doctrine to decide whether the lower court had misapplied the relevant legal standards. The Court finds reversal appropriate here mainly because the district court gave the plaintiffs’ choice of forum no weight at all in its discussion of the balance of conveniences.

“The more that a plaintiff, even a foreign plaintiff, chooses to sue in a United States court for ‘legitimate reasons,’ the more deference must be given to that choice ... The action should be dismissed only if the chosen forum is shown to be genuinely inconvenient and the selected forum significantly preferable.” [Slip op. 3] The Court holds that plaintiffs’ reasons for suing in defendants’ own country were legitimate and substantial in light of the vicissitudes of seeking relief in Egypt.

Furthermore, since the key witnesses, the parties and the attorneys are located in either the U.S. or Canada, no genuine inconveniences exist that would make the Egyptian forum “significantly preferable.” The Court need not decide whether another forum, such as Canada, might be more appropriate since the only germane comparison in this appeal is between the U.S. and Egypt.

Dissenting in part and concurring in part, one Judge agrees that the district court had applied the wrong test in determining whether dismissal is appropriate under forum non conveniens. This Judge however, would merely vacate the judgment, leaving it entirely to the informed discretion of the district court on remand.

Citation: Bigio v. Coca-Cola Co., No. 05-2426-cv (2d Cir. May 9, 2006).

SOVEREIGN IMMUNITY

In New York City’s suit to collect local property taxes on non-diplomatic portions of realty owned by U.N. missions of India and Mongolia, Second Circuit rules that liability to pay such taxes falls within real property exception to Foreign Sovereign Immunities Act

The headquarters of the Permanent Mission of India to the United Nations (the PMI) lies in a 26‑floor building on East 43rd Street in New York City owned by the Government of India. The PMI uses the first six floors, basement, and cellar of this building mainly for diplomatic offices, while the top 20 floors consist of residential units. Sixteen diplomatic employees of the PMI (all below the rank of Head of Mission or Minister Plenipotentiary) and their families, as well as security personnel and a driver, live in these units; all of these employees are Indian nationals who receive this housing rent‑free.

A six-story building on East 77th Street houses the Ministry for Foreign Affairs (MFA) of the People’s Republic of Mongolia (the PRM) which the PRM owns. The occupants seemingly use the first two floors for the MFA’s offices and the third floor for the Ambassador’s apartment. On the top three floors, there are six apartments in which lower‑level employees of the mission and their families reside, rent‑free. Both missions claim that, for various reasons, the housing of diplomatic employees on‑site is essential.

New York law exempts real property owned by a foreign government from taxation if it is “used exclusively” for diplomatic offices or for the quarters of a diplomat with the rank of ambassador or minister plenipotentiary to the United Nations. N.Y. Real Property Tax L. Section 418. On the other hand, “[i]f a portion only of any lot or building... is used exclusively for the purposes herein described, then such portion only shall be exempt and the remainder shall be subject to taxation.” Id.

The City has been levying property taxes against the two properties in question for years, but has been unable to get the missions to pay. By operation of New York law, these unpaid taxes eventually became tax liens held by the City against these two properties. According to the City, as of February 1, 2003, the PMI property owed about $16.4 million in unpaid property taxes and interest, while the MFA is in arrears for about $2.1 million.

In April, 2003, the City filed separate complaints in state court seeking judgments establishing the validity of the tax liens on the mission buildings. Both missions removed their cases to the New York federal court. After limited discovery, the missions moved to dismiss for lack of subject matter jurisdiction. The district court denied the motions in July 2005 solely on the ground that these suits implicate the “immovable property” exception to the Foreign Sovereign Immunity Act’s (FSIA’s) general rule that foreign governments are immune from suit. This interlocutory appeal followed. The U.S. Court of Appeals for the Second Circuit affirms and remands.

[Meanwhile, Congress has been actively involved in the issues directly pertaining to this litigation. Provisions included in appropriations bills enacted in each of the past two years require that 110 percent of unpaid property taxes owed by any country be withheld from that country’s foreign aid. For unpaid property taxes to be subject to this withholding requirement, however, the amount owed must be determined “in a court order or judgment entered against such country by a court of the United States or any State or subdivision thereof.” Foreign Operations, Export Financing, and Related Programs Appropriations Act of 2006, P.L. No. 109‑102, Section 543 (2005); Consolidated Appropriations Act of 2005, P.L. No. 108‑447, Section 543 (2004). Thus, this provision cannot be activated if no court can adjudicate the property tax controversy.]

The Circuit Court first notes that it reviews de novo the district court’s conclusions of law regarding jurisdiction under the FSIA. Moreover, the plaintiff who seeks to establish jurisdiction bears the burden of producing evidence sufficient to support a finding that a specific exception to its presumptive immunity applies; the foreign state then bears the ultimate burden of persuasion on this question.

In this case, the City argued that jurisdiction lies under the FSIA’s “immovable property” exception. It provides that a foreign state shall not be immune from jurisdiction in any case in which “rights in immovable property situated in the United States are in issue.” 28 U.S.C. Section 1605(a)(4). The parties take very different stances on how generously to read this exception. It is a matter of first impression in the Second Circuit whether the exception only applies to disputes over title, ownership or possession of the immovable property itself or whether it reaches more broadly to suits like this one over the validity of a tax lien.

Here, the controversial issue is the meaning of “rights in” immovable property. Looking at the mere words, the Court finds that it supports the City’s position. By its terms, it does not limit itself to cases where the specific right at issue is title, ownership, or possession. It certainly does not specifically exclude cases where the right at issue is a lien. The plain language does not restrict this provision to cases where the foreign government’s rights in the property are at issue. The words suggest that it would suffice that the City’s rights in the property are in dispute. There is, however, some ambiguity.

“Until the middle of the last century, the United States followed what is known as the ‘classical or virtually absolute theory of sovereign immunity,’ the animating principle of which was that a sovereign cannot, without his consent, be made a respondent in the courts of another sovereign. [Cite].”

“In 1952, the Tate Letter announced the United States’ decision to join most other countries in switching to the so‑called ‘restrictive theory’ of sovereign immunity, under which ‘the immunity of the sovereign is recognized with regard to sovereign or public acts (jure imperii ) of a state, but not with respect to private acts (jure gestionis).’ It is clear from the legislative history and settled in our caselaw that Congress’s intent in enacting the FSIA was to largely codify the restrictive theory of sovereign immunity set forth in the Tate Letter.”

“Applying the general principle that animates the Tate Letter and, thus, the FSIA itself ‑‑ immunity is available only where a state is acting in a sovereign capacity, and not with respect to a state’s ‘private acts’ ‑‑ we think ownership of real estate in a foreign country must be considered the latter, because ownership itself is not inherently a sovereign act.”

“However, as actually codified in the FSIA, the diplomatic property exception applies only to protect property used for such purposes from attachment or execution following a judgment. See 28 U.S.C. Section 1610(a)(4)(B) (stating that immovable property situated in United States is subject to attachment, ‘Provided, That such property is not used for purposes of maintaining a diplomatic or consular mission or the residence of the Chief of such mission’). Thus, it is quite clear from the text that the FSIA does not bar jurisdiction, but does bar certain remedies, on the basis of a property’s diplomatic status.” [Slip op. 7]

Reliable legislative history also supports this understanding. “In general, the House Report restates the immovable property exception in terms as broad as, or even broader than, those used in the text itself.[Cite]. In addition, it confirms that consideration of a property’s diplomatic status takes place with respect to available remedies, not with respect to jurisdiction.”

“Moreover, the narrow interpretation of the immovable‑property exception put forward by defendants is difficult to square with Congress’s explicit reliance on the courts to adjudicate the property tax liabilities of foreign governments.[Cites]. Here, adoption of the defendants’ proposed interpretation of FSIA would make dead letters out of Congress’s recent enactments, which were intended to address the exact controversy before us today, because no court could provide the adjudication required to trigger them. We do not lightly reach such a result, and certainly will not do so where nothing in the statutory language or legislative history remotely requires it.”

“Finally, because the FSIA was intended to codify an already existing practice of following the restrictive theory of sovereign immunity, and because that policy was itself meant to bring the United States into conformity with other countries that had already adopted, or were in the process of adopting, the restrictive theory, it is instructive to look at contemporaneous expressions of the content of this exception to sovereign immunity for actions involving real property owned by the foreign state. ... First, the 1965 Restatement (Second) of Foreign Relations Law of the United States, the most recent restatement at the time of the FSIA’s adoption, states that a foreign state’s immunity does not extend to ‘an action to obtain possession of or establish a property interest in immovable property located in the territory of the State exercising jurisdiction.’Id at Section 68(b). Thus, at the time of the FSIA’s adoption, any action to ‘establish a property interest in immovable property’ was permissible.”

“Second, [Article 9 of] the European Convention on State Immunity, which was drafted in 1972 and ratified in 1976, just prior to the enactment of the FSIA, states: ‘A Contracting State cannot claim immunity from the jurisdiction of a court of another Contracting State if the proceedings relate to: (a) its rights or interests in, or its use or possession of, immovable property; or (b) its obligations arising out of its rights or interests in, or use or possession of, immovable property and the property is situated in the territory of the State of the forum.’ The European understanding ‑‑ presumably known to the drafters of the FSIA ‑‑ was that this exception covered a broad range of suits, including those arising out of the foreign state’s obligations stemming from its ownership of property.”

“Of course, we must take note that Congress elected not to use the far more detailed language of the European Convention. Yet nothing in the vague but broad formulation used in the FSIA ... precludes its interpretation as synonymous to the European Convention’s version. The European Convention version is split into two prongs, the first covering the foreign state’s rights in the immovable property and the second addressing the state’s obligations arising out of its ownership of property.”

“Congress did not simply adopt language tracking the first prong, and thereby limit the reach of the immovable‑property exception to cases in which the foreign state’s rights in the property are at issue, but rather passed a provision that does not specify whose rights must be at issue. As indicated, supra, we think this provision, therefore, is most naturally read to cover not only the foreign state’s rights in the property but also its obligations, i.e., rights retained in the property by the local state or another party.”

“Shortly after the FSIA’s passage, the International Law Commission (the ‘ILC’) began work on what is now known as the United Nations Convention on Jurisdictional Immunities of States and Their Property (UNC). In 1983, it finalized its version of the immovable property exception, which largely tracks the European Convention’s version.”

“Not only did the ILC draft a broad and detailed version of the immovable property exception, it gave a coherent account of why such an exception has always been recognized, even under the absolute theory of sovereign immunity. [As the ILC points out], [t]he acquisition and continued ownership of property in a foreign country ‘is made possible only by virtue of the application of the internal law or private law of the State of the situs.’ [Cite]... Because ownership itself is only possible through the operation of local law, ‘[t]he outside State or extraterritorial State as an outsider must, from the start, fully recognize and respect the local or territorial internal law which unquestionably governs the legal relationship between the foreign State and the property so acquired.’” [Slip op. 8-10]

“Ownership of property connotes a bundle of related rights and obligations defined by local property law. A foreign state cannot assume the benefits of ownership ‑‑ including the right to exclude others from the property with the assistance of the local government and, significantly, the right to sue those who violate its rights ‑‑ while simultaneously disclaiming the obligations associated with them. When owning property abroad, a foreign state must follow all the same laws that pertain to private owners of such property, except to the extent that it can point to specific exceptions in that country’s agreements with the United States, treaties, or other sources of law. This principle ‑‑ when owning property here, a foreign state must follow the same rules as everyone else ‑‑ long predated the restrictive theory of sovereign immunity and the FSIA. See The Schooner Exch. v. McFaddon, 7 Cranch 116 (1812) ... We see no evidence that the FSIA was meant to alter it.”

“We conclude that the ‘immovable property’ exception to foreign sovereign immunity should be construed to include any case where what is at issue is: (1) the foreign country’s rights to or interest in immovable property situated in the United States; (2) the foreign country’s use or possession of such immovable property; or (3) the foreign country’s obligations arising directly out of such rights to or use of the property. We think this interpretation is the most consistent with the broad, albeit vague, language of the provision itself, as well as with the FSIA’s general principle of withdrawing sovereign immunity where states act in the same manner as private actors.” [Slip op. 11]

“... What is in dispute in this case is the extent of defendants’ obligations under local law (here, property taxes) arising directly out of their ownership of real property in the United States. The immovable property exception thus provides jurisdiction over this matter. ...”

“The instant dispute appears to revolve around the proper interpretation of a treaty [the Vienna Convention on Diplomatic Relations, 23 U.S.T. 3227; T.I.A.S. 7502; 500 U.N.T.S. 95, in force for U.S. Dec. 13,1972] and the application of that treaty to these facts. The Supreme Court has made clear that such a controversy is well within the competence and authority of the federal courts and is not a non‑justiciable political question.[Cites]. Leaving such construction to the courts does not threaten the United States’ compliance with international protections for diplomatic property; rather, the alternative ‑‑ granting dismissal for want of jurisdiction whenever a defendant can raise a plausible claim of the treaties’ applicability ‑‑ could effectively expand the treaties’ scope.” [Slip op. 12-13]

The Court, however, does not express any opinion as to whether the City may levy property taxes on those portions of embassy buildings that are used to house lower‑level diplomatic employees. The Court only holds that the district court correctly found that it had jurisdiction to hear the controversy.

Citation: City of New York v. The Permanent U.N. Mission of India, 2006 WL 1086376 (2nd Cir. April 26).

TAXATION

In English suit by U.S. parent corporations of UK companies seeking restitution for discriminatory collection of Advance Corporation Tax, Court of Appeal (Civil Division) (1) dismisses appeals under UK law because anti-discrimination provision of US/UK Double Taxation Convention never became internal law of UK and (2) rules that it should refer questions of EU law under Articles 56 and 57 to European Court of Justice unless case goes before House of Lords

After the decision of the European Court of Justice (ECJ) in Hoechst v. Attorney‑General, Metallgesellschaft v. Attorney‑General, Joined Cases C‑397/98 and C‑410/98 [2001] ECR I‑1727, [2001] Ch 620 (the Hoechst case), certain parent companies which are citizens of countries other than the United Kingdom (here, two from the United States) which lie outside of the European Union, filed suits in the English Courts against the Commissioners for Her Majesty’s Revenue and Customs (Commissioners) over their liability to pay an Advance Corporation Tax (ACT).

This branch of the litigation specifically deals with the liability to pay ACT in connection with the payment of dividends by companies incorporated in the UK which are subsidiaries of two U.S. parent companies. Following that decision many claims have been made by parents or subsidiaries or both, where the parent is based in another Member State, seeking restitution in respect of ACT which should not have been paid.

There are two main aspects to these claims. First, the U.S. plaintiffs argue that the inability of the non‑resident parent to join in a group income election violates the US/UK Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains [31 U.S.T. 5668; T.I.A.S. 968231 of December 1975] [DTC] as incorporated into UK law. Secondly it is said that this inability also breaches Article 56EC.

The first instance court ruled that the legislation did contravene the terms of the DTC, but that the relevant provisions were not part of UK internal law, so that the UK courts could provide no domestic remedy. He also decided that the legislation clearly did not breach Article 56EC, and that hence he should not refer this question to the ECJ.

On appeal to the Court of Appeal - Civil Division, the plaintiffs also raised the question whether this Court should make such a reference after or before a likely further appeal to the House of Lords. The appellate court dismisses the appeal on the first claim and declines at this point to refer the EU law questions to the ECJ.

The following are some key facts from the parties’ Agreed Statement. Bush Boake Allen, Inc. is a company resident in the United States and the direct or indirect parent of three relevant companies domiciled in the UK. Between January 1996 and April 1999, the three subsidiaries paid dividends to their direct or indirect U.S. parents, and paid ACT accordingly amounting in all to £2.2 million surplus ACT.

Gallaher Ltd. is a UK company; at all material times it was a wholly‑owned subsidiary of a U. S. company, ATIC Group Inc. Between July 1995 and January 1997, Gallaher paid dividends to its parent; on one occasion within that period it made a distribution in the form of shares to its parent which counted as a qualifying distribution and therefore attracted the same liability to pay ACT as did the payment of a dividend. It paid ACT accordingly, amounting in all to £153,762,615. All of this was set off against a levy which is sometimes called “mainstream corporation tax” or MCT.

Acushnet Ltd. is a UK company, and a wholly‑owned subsidiary of Acushnet International Inc. of the U.S. The subsidiary paid dividends to the parent from 1989 up to and including 1999. On each occasion, the subsidiary also paid ACT. If these U.S. parents and their subsidiaries had been able to join in a group income election, they would have done so.

The U.S. plaintiffs focus on the fact that UK resident subsidiaries of U.S. parents had to pay ACT because they could not join in a group income election, whereas UK subsidiaries of a UK parent could have avoided the need to pay ACT. They allege that this amounts to two violations of law. First, it restricts movements of capital, or payments, or both from the UK subsidiaries to the foreign parents, contrary to Article 56EC. Secondly it consists of an “other or more burdensome” taxation or connected requirement than those imposed upon other similar enterprises, in breach of the DTC.

The U.S. plaintiffs seek the following remedies: (a) a declaration that the ACT provisions as they apply to the plaintiffs contravened the DTC and are, therefore, illegal; (b) restitution or damages for breach of, or failure to comply with, the DTC; (c) a declaration that the ACT provisions as applied to the plaintiffs violated Article 56EC and thus are illegal; (d) restitution and/or damages for these breaches.

The provisions about group income elections which lie at the heart of this case are in section 247. Section 247(1) (ignoring immaterial words) is as follows: “Where a company (‘the receiving company’) receives dividends from another company (‘the paying company’), both being bodies corporate resident in the United Kingdom, and the paying company is (a) a 51% subsidiary of the other ... then, subject to the following provisions of this section, the receiving company and the paying company may jointly elect that this subsection shall apply to the dividends received from the paying company by the receiving company (‘the election dividends’)”. While an election is in force, the election dividends are part of the group income of the receiving company. They are thus part of that company’s profits.

DTCs are treaties concluded between sovereign states. Under UK law, treaties are entered into in the exercise of the prerogative power of the Crown. Under UK law, however, treaties are not “self‑executing.” The intervention of Parliament is needed, either directly by statute or by statutory delegation authorizing another person or body to bring the treaty into effect domestically. In the case of DTCs, Parliament has delegated to Her Majesty the power to bring the treaties into domestic effect by Order in Council.

The UK’s numerous DTCs are all bilateral agreements. Nearly all of them, however, derive from a draft produced, with a supporting commentary, by the Organization for Economic Cooperation and Development (OECD). Among the States which have entered into DTCs with the UK, the ones containing “non‑discrimination” clauses are Japan, Switzerland and the United States, all non‑EC countries.

For the U.S. plaintiffs-appellants, what arguably governs here is the above DTC between the U.S. and the UK. Article 24, the non‑discrimination article, provides that: “Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State shall not be subjected in the first‑mentioned Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome, than the taxation and connected requirements to which other similar enterprises of that first‑mentioned State are, or may be, subjected.”

As the lead opinion declares: “The U.S. appellants contend that the ACT provisions ... are in breach of the non‑discrimination article in the [U.S. / UK DTC] and that the non‑discrimination article is given direct and overriding effect as part of UK law by virtue of the opening words of ICTA section 788(3). This gives rise to two questions: (1) is there a breach of the non‑discrimination article? (2) if so, is the non‑discrimination article incorporated as part of UK law by virtue of section 788? The judge below held that there was a breach but that the non‑discrimination article was not (relevantly) incorporated into UK law.” [¶ 33].

Next, the Court addresses whether the ACT provisions are inconsistent with the non‑discrimination articles. “The debate on this point turns on the meaning of the following words in the relevant provision of the non‑discrimination article: ‘other similar enterprises of that first‑mentioned State’. The case concerns enterprises of one Contracting State (UK) the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State (the USA in this instance), and to the taxation to which the UK subsidiary is subjected in the UK.” [¶ 34].

“[T]he Respondent argues that the non‑discrimination article is concerned with the taxation of the UK company, not with that of its parent, wherever that may be resident, and that a comparison which requires attention to be given to the tax status of the parent is outside the scope of the non‑discrimination article.” [¶ 36].

“...[T]he judge [below] was right to hold that the ACT provisions, on their face, are inconsistent with the non‑discrimination article because the UK subsidiary of a foreign company cannot avoid having to pay ACT when it pays a dividend by entering into a group income election, unlike members of a UK group. To limit the availability of group income elections to subsidiaries of UK companies is a breach of the non‑discrimination article of the Conventions.” [¶ 44].

The Court of Appeal then considered whether the non‑discrimination article has been incorporated into UK law in relation to ACT. “The judge held that, even though the non‑discrimination article was infringed by the ACT provisions, there was no remedy for this under UK law because the provisions of the [DTC] as regard ACT are not incorporated into UK law by section 788.” [¶ 45].

“ACT was introduced by the Finance Act 1972. In the same Act, the two aspects of [MCT] were brought into line, in particular as regards double taxation provisions. By section 100 of that Act, the double taxation provisions of the Income and Corporation Taxes Act 1970 (ICTA) applicable to corporation tax in respect of income ‘shall apply also to corporation tax in respect of chargeable gains’. Section 98(2) effected the introduction into section 497 of what has now become section 788(3)(d), referring to the right to tax credits, such as are provided for in the [DTC]. Section 788(3)(a) has followed its predecessor, as amended, by referring to corporation tax in respect of income and chargeable gains, rather than just to corporation tax.”

“The question is whether, by using the composite phrase, it means only (MCT), or whether it really means no more than ‘corporation tax’, so as to include ACT. Clearly it is an inclusive provision, by contrast with the former phrase which distinguished between corporation tax on one type of profits and that on the other.” [¶ 49].

Salomon v. Customs & Excise Commissioners [1967] 2 QB 116, at 143 further amplifies the English process of granting internal effect to international agreements: “Where, by a treaty, Her Majesty’s Government undertakes either to introduce domestic legislation to achieve a specified result in the United Kingdom or to secure a specified result which can only be achieved by legislation, the treaty, ... remains irrelevant to any issue in the English courts until Her Majesty’s Government has taken steps by way of legislation to fulfil its treaty obligations. Once the Government has legislated, ... the court must, in the first instance, construe the legislation, for that is what the court has to apply.” [¶ 52]

The Court of Appeal agrees with the judge [below] that the non‑discrimination article has not been incorporated into UK domestic law insofar as it relates to ACT. “Section 788 is a different kind of provision, which has its equivalents in other fiscal legislation, such as those relating to capital gains tax and to inheritance tax mentioned above. It provides for a class of treaty obligations to be given effect to by Orders in Council. Some such Orders were already in force when section 788 became law, and others could be expected to be introduced by further orders thereafter. I agree that the section gives effect only to certain provisions of DTCs.”[¶ 58].

“Since the section is selective as to what provisions of a [DTC] are given direct effect under UK law, I agree with the judge [below] that it would not be right to approach the question of interpretation with a presumption that it was intended to give effect to all provisions of the DTC. So then the question is what is the natural meaning of the words in paragraph (a): ‘corporation tax in respect of income and chargeable gains’? Is it equivalent to ‘corporation tax’, so as to include ACT, or does it refer only to mainstream corporation tax and exclude ACT?” [¶ 59].

“[The] most powerful indication of the natural meaning of the phrase in paragraph (a) is to be found in the juxtaposition of the short and general phrase ‘corporation tax’ in the opening words with the longer and more specific phrase ‘corporation tax in respect of income and chargeable gains’ in paragraph (a).”

“ ... I conclude that the paragraph is intended to have a more limited scope, and that it does not extend to ACT. In my judgment, although ACT is certainly ‘corporation tax’ ... , it is not ‘corporation tax in respect of income or chargeable gains’. For those reasons, it seems to me that the judge was right to hold that the Appellants have no remedy under UK law as such, by reference to the [DTC].” [¶ 61].

Appellants’ alternative and preferred challenge to the ACT provisions is that the ACT provisions do not square with Article 56EC. Article 56EC provides: “(1). Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member State and third countries shall be prohibited. (2). Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.” [¶ 61].

“[Appellants] do not suggest that we ought to decide whether the ACT provisions are restrictions which are prohibited by Article 56 and not saved by Article 57.1, but rather submits that we ought to refer that question to the European Court of Justice [under Article 334EC].” [¶ 64].

Respondent replied that the Court ought not to consider any such reference because he says it is clear that, even if the ACT provisions are restrictions within Article 56, they are protected by Article 57.1. Alternatively, he contended that no English court should make a reference until after the case has been to the House of Lords (if, as both sides seem to anticipate, it will) because only then would it be clear what, if any, restrictions there are under UK law.

After reviewing the evolution of Articles 56 and 57(1) over the last forty plus years, the Court of Appeal declares as follows. “The [referred] question would be, [that] assuming that UK law does impose restrictions on payments between the UK and third countries (... so that there is no remedy under the [DTC]) and accepting that these restrictions were in place already on 31 December 1993, are those restrictions saved by Article 57.1, as being relevant restrictions on capital movements?” [¶ 71]

“... [I]t seems to me that, if the decision of this court as to the position under UK law were the last word on that point, it would be appropriate to refer to the [ECJ] the question whether the ACT provisions constitute a restriction on capital movements or on payments or both, under Article 56, and, depending on the answer to that, whether they are within the scope of Article 57.1 so as to be of continuing effect despite Article 56.” [¶ 76].

The lead opinion summarizes the Court of Appeal’s conclusions. “[T]he judge [below] was right on the question of the interpretation of the [DTC] and on the effect of section 788, so I would dismiss the appeal as regards those issues. I also consider that he was right not to refer a question under Articles 56 and 57 to the European Court of Justice, though not for the reason that he gave. If this case is to proceed further to the House of Lords, on the questions of domestic law, I would not refer such a question at this stage. Otherwise I would do so.” [¶ 83].

Citation: Boake Allen Limited v. The Commissioners for Her Majesty’s Revenue and Customs, [2006] E.W.C.A. Civ. 25, 2006 WL 63703 (C.A. (Civ. Div.)) (January 31).