2007 International Law Update, Volume 13, Number 8 (August)

2007 International Law Update, Volume 13, Number 8 (August)

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

ACT OF STATE

D.C. Circuit finds that Central Bank of Brazil is “a person” other than Brazilian state for tax purposes where Bank “stood in” for ultimate beneficiaries of loan made by U.S. Company, thus removing need to apply Act of State doctrine

During the 1970s and early 1980s, Brazil used tax breaks to encourage its citizens to borrow from foreign lenders. After a financial crisis in 1982, Brazil entered into a debt‑restructuring plan and borrowed additional sums. PNC Financial Services Group, Inc. (Plaintiff) lent a portion of the additional sums. In 1984 and 1985 Plaintiff paid the Brazilian interest income tax of 25%, however, another provision of Brazilian law gave subsidies for these taxes worth 40% of the tax due.

The relevant provision of Treasury Regulations provides that “When a U.S. bank makes a loan abroad, the interest income is susceptible to tax in both the United States and the foreign state. Congress avoids double‑taxing international business by giving a credit for taxes paid to the foreign government, less any credit, refund, or subsidy given the taxpayer by the foreign government. I. R. C. § 901; Treas. Reg. § 1.901‑2(e).” [Slip op. 2]

Plaintiff claims a foreign tax credit for taxes paid on its behalf in Brazil. The Internal Revenue Service (Defendant) claims that it has to reduce the credit by the amount of the indirect subsidy received from the Brazilian Government. The Tax Court agreed with the Internal Revenue Service.

The U.S. Court of Appeals for the District of Columbia Circuit affirms the Tax Court. Three additional factors complicate this case: “First, [Plaintiff’s] loans to the Central Bank were ‘net,’ not ‘gross.’ [Riggs Nat’l Corp. & Subsidiaries v. Commissioner of Internal Revenue Service, 163

F.3d 1363, 333 U.S.App.D.C. 371, 83 A.F.T.R.2d 99‑438, 99‑1 USTC P 50,185 (D.C. 1999) (‘Riggs II’)] gives a matchless explanation of the difference, which we will not belabor here. Suffice it to say that in a gross loan agreement, the lender pays local (Brazilian) taxes on his interest income (or the borrower withholds it), while in a net loan, the borrower

‘contractually agrees not only to pay interest to the lender, but also to pay any local (Brazilian) tax that the lender owes on that interest income.’ [Cite].”

The second factor stems from the unique character of the borrower. “Created by law to implement Brazil’s monetary and fiscal policies (including issuing currency), required to act on behalf of Brazil’s government and prohibited from acting on behalf of anyone else, able to contract in the name of the National Treasury, responsible for managing foreign lending to Brazilian borrowers, and under the control of the Minister of Finance, the Central Bank is 100% a part of Brazil’s federal government, as all parties agree.

The Federal Constitution of Brazil makes the Central Bank immune from tax on its own income, and in fact, until 1988, the Central Bank operated, along with the National Treasury and the Banco de Brasil (in which Brazil’s government held a controlling share), a centralized system for funding Brazil’s government that jointly controlled Brazil’s tax revenue (although it was the Banco de Brasil that actually held the government’s tax revenue in its coffers).” [Slip op. 3].

“We must pause at this point to understand PNC’s and the Central Bank’s (or rather, Brazil’s) interests on the eve of their lending arrangement. Only if the Central Bank was subjected to compulsory tax payments on PNC’s behalf could PNC qualify for the § 901 credit.”

“Only the Central Bank’s constitutional immunity from taxes stood in the way, and the third complexity in this case concerns how that immunity was overcome.” Brazil’s Minister of Finance issued a binding private letter ruling stating that, “The Minister deemed it appropriate to ‘look through’ the Central Bank to those ultimate private borrowers – so‑called ‘borrowers‑to‑be’‑‑for purposes of deciding the proper tax treatment of the loans. And it was settled Brazilian law that a private borrower in a net loan was required to pay the tax obligation it had contractually assumed from the lender.” [Slip op. 4]

“Brazil had a subsidies system (sometimes called a ‘pecuniary benefits’ system in this litigation) that effectively returned 40% of any tax payment Brazilian borrowers in international net loans made on their foreign lenders’ behalf. Mechanically, the two halves of the transaction – making the tax payments and receiving the subsidy – were ‘simultaneous[],’ both occurring ‘before paying the interest to the foreign lender’ and in such a way as to credit Brazil’s national treasury’ only with the amount by which the withholding tax exceeded the subsidy.’ [Cite]. In the Tax Court, no one doubted that this arrangement would have amounted to an indirect subsidy and properly reduced PNC’s foreign tax credit had the borrower been a private party.” [Slip op 5‑6]

“As a threshold matter, we must determine what it means for the recipient of a subsidy to be ‘another person’¼ we shall assume for purposes of this appeal that PNC’s § 901 credit should be reduced if, and only if, the recipient of the subsidy (the Central Bank) is a person other than the Brazilian government.” [Slip op 7]

In a previous case, this Court had applied the Act of State doctrine to the Minister of Finance’s letter ruling and found that “¼whether or not it can be said that the Brazilian Minister of Finance’s interpretation of Brazilian law qualifies as an Act of State, the Minister’s order to the Central Bank to withhold and pay the income tax on the interest paid to the Bank goes beyond a mere interpretation of law. The Minister, after all, ordered that the Central Bank ‘must, in substitution of the future not yet identified debtors of the tax [i.e., the borrowers‑to‑be], pay the income tax¼’ Such an order has been treated as an Act of State.” [Slip op. 9]

“Put in the affirmative, the holding here is that American courts must accept as given that the Brazilian government levied a compulsory tax payment on the Central Bank, where the Central Bank stood in for borrowers‑to‑be¼That resolves the present appeal, for if the Central Bank stood in for borrowers‑to‑be when it paid PNC’s taxes, it also stood in for them when it received 40% of those tax payments back in subsidies.” [Slip op. 9]

“In concluding that the Central Bank is ‘another person’ in the sense of the Treasury Regulation, we need not apply the Act of State doctrine. Rather, in the interest of consistency, we need only adhere, as a law‑of‑the‑case matter, to the necessary implications of [our precedent]. There, the court held that, based on the act of state doctrine, American courts had to accept the Minister’s determination that the Brazilian government had compelled the Central Bank to remit tax payments on PNC’s behalf, standing in for the borrowers‑to‑be. In that role, the Central Bank was distinct from the Brazilian government. Thus, as the payment and the subsidy are both part of the same indivisible transaction, [precedent] necessarily implies [that] the Central Bank is likewise distinct for purposes of the subsidy.” [Slip op. 10]

Citation: PNC Financial Services Group, Inc. v. Commissioner of Internal Revenue, 2007 WL 2403550 (D.C. Cir. 2007).

ANTI‑SUIT INJUNCTION

Ninth Circuit holds that considerations of “international comity” do not require U.S. court to submit to English court’s injunction against proceeding, where content of forum selection clause is disputed and Plaintiff filed case in U.S. Court prior to Defendant’s filing in English Court that issued injunction

Dependable Highway Express, Inc. (Plaintiff) operates a warehouse in Los Angeles. Navigators Insurance Company (Defendant) issued indemnity insurance to Plaintiff. A dispute arose when Defendant refused to reimburse Plaintiff for costs related to two cargo thefts, which cost the Plaintiff approximately $245,000. Plaintiff filed a lawsuit in a California state court alleging breach of contract.

Defendant obtained an injunction in an English Court preventing Plaintiff proceeding with litigation in the United States based on the “Columbus Wording” contained in the contract. It required an English arbitration of any disputes. Defendant then removed the California case to federal court and moved to dismiss based on the English proceedings. The district court acknowledged the English court’s injunction and stayed the proceedings “pending the resolution of the London proceedings, including arbitration.”

Plaintiff appealed to the Court of Appeals for the Ninth Circuit. After assessing the legitimacy of the district court’s grounds for issuing the stay, the court turned to the central issue of the case. “Having determined that the district court’s stated grounds for issuing the stay were erroneous, we next consider whether the stay nevertheless should be upheld under principles of international comity, as urged by [Defendant]. See Forest Guardians v. U.S. Forest Serv., 329 F.3d 1089, 1097 (9th Cir. 2003) (‘[W]e are free to affirm the district court on any ground supported by the record and briefed by the parties, and we are not limited to reviewing the district court’s stated basis for its decision.’).” [Slip op. 8]

“¼[W]e conclude that invoking the international comity doctrine would be inappropriate on the inadequate record before us. [Plaintiff ] filed suit in a U.S. forum before [Defendant] brought its anti‑suit injunction action in the English court. The English court thus had the ‘initial opportunity to exercise comity,’ Laker Airways, 731 F.2d at 939, but elected not to. Moreover, the clear thrust of [Defendant’s] English action was to halt [Plaintiff’s] domestic proceedings – a tactic frowned upon in Laker Airways. Cf. id. at 938 (“[B]y any definition, the injunctions of the United Kingdom courts are not entitled to comity. This is because the action before the United Kingdom courts is specifically intended to interfere with and terminate Laker’s United States antitrust suit . . . . [T]he English injunction seeks only to quash the practical power of the United States Courts to adjudicate claims under U.S. law. . .’). Indeed, the express purpose of an anti‑suit injunction, be it offensive or defensive, is to block litigation in a separate forum. Comity is not required where the British action was filed after the U.S. action for the sole purpose of interfering with the U.S. suit.” [Slip op. 9‑10]

“¼ [Defendant] claims it has acted in accordance with the terms of a forum selection clause that it believed to have been part of the insurance contract. Despite [Defendant’s] purportedly good intentions, however, the practical effect of its action in English court was to interfere with the domestic forum’s ability to adjudicate the dispute.” [Slip op. 10]

“If the record were clear that the parties [had] agreed to foreign arbitration, or if the district court [had] made such a determination, we would have little trouble upholding the stay on grounds of international comity. [Cite]. The English court would not have been bound by principles of comity in the first instance, and the district court’s stay would have simply recognized the validity of the parties’ forum selection clause. [Cite].”

“Central to the dispute before us, however, is the parties’ disagreement over the very existence of arbitration and forum selection clauses designating London as the site of the arbitration and English law as the sole means of settling insurance coverage disputes. [Cite]. Where, as here, the record does not even contain a copy of the original insurance contract, it would be improper to invoke international comity based on the mere possibility of upholding a disputed forum selection or arbitration clause.” [Slip op. 10‑11]

“We hold that the district court’s indefinite ... stay was an abuse of discretion. Furthermore, upholding the stay under the doctrine of international comity would be inappropriate at this stage based on the limited record before us. We remand so the district court can develop the record in order to determine whether [Plaintiff] and [Defendant had] agreed to arbitrate disputes arising from the insurance contract.” [Slip op. 11]

Citation: Dependable Highway Express, Inc. v. Navigators Ins. Co., 2007 WL 2379611 (9th Cir. 2007).

ARBITRATION

Seventh Circuit rules that, in absence of choice‑of‑law provision in arbitration agreement, court will apply federal common law rule under New York Arbitration Convention to agreed time limits for demanding arbitration

Certain Underwriters at Lloyd’s London (Appellees) were a reinsurance syndicate, which included citizens of the United Kingdom. It entered into certain reinsurance contracts with Argonaut Insurance Company (Appellant), a California based insurer.

The contracts contained an arbitration provision that provided in relevant part that: “If any dispute shall arise between the Company and the Underwriters with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, this dispute shall be referred to three arbitrators, one to be chosen by each party and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty days after receipt of written notice from the other party requesting it to do so, the requesting party may nominate two arbitrators, who shall choose the third.” [Slip op. 2]

A dispute arose when Appellant made a claim for reimbursement from Appellees for settlement of certain claims. Appellees requested additional information from Appellant. Appellant sent an arbitration demand on August 4, 2004, which included a request that the Appellees name its arbitrator within 30 days. Appellees named an arbitrator on September 3, 2004. On August 6, 2004 Appellees sent a demand that Argonaut name its arbitrator within 30 days.

Argonaut’s 30 day period ended on September 5, 2004 a Sunday. Appellant had not yet named an arbitrator by that date. On September 6, 2004, which was Labor Day, a legal holiday in the U.S. but not in the U. K., Appellees sent notice to Appellant that the time limit had expired and itself designated a second arbitrator. Because of the parties’ competing demands for arbitrators, Appellees filed a petition in the U.S. district court under 9 U.S.C. § 5 for an order confirming the appointment of its two nominees as arbitrators in the dispute. The U.S. district court granted summary judgment for the Appellees Underwriters at Lloyd’s London, confirming the arbitrators’ decision. Argonaut now appeals.

The U.S. Court of Appeals for the Seventh Circuit affirms. “The [United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 (implemented by 9 U.S.C. § 201 et seq.) (New York Convention)] is a multilateral treaty that entered into force on June 7, 1959. The substantive provisions of the Convention mandate first that courts of contracting nation‑states give effect to arbitration provisions included in international commercial agreements; they further require courts to recognize and enforce arbitral awards made within the jurisdiction of other contracting nation‑states.” [Slip op. 7]

Because the arbitration agreement contained no choice‑of‑law provision the court turned to the issue of what law applies. “We believe that this overarching federal concern with the uniformity of treatment of international arbitration agreements requires that the issue before us be resolved by a federal common law rule, rather than by a state rule of decision.” [Slip op. 10]

“We stress that we deal here with more than a generalized federal interest in uniformity that might be insufficient to warrant application of a federal rule. [Cite] The uniformity at issue here is one that implicates the very specific interest of the federal government in ensuring that its treaty obligation to enforce arbitration agreements covered by the Convention finds reliable, consistent interpretation in our nation’s courts.”

“The application of parochial rules that excuse or extend contractual deadlines to agreements arising under the Convention would frustrate one of the primary objectives of the United States in becoming a signatory to the Convention: securing uniform standards by which agreements to arbitrate international disputes are governed.”

“¼[W]e hold that, in this circumstance, the injection of a parochial rule that interprets a contractual deadline other than by its plain wording is contrary to the interests of the United States as embodied the Convention.” [Slip op. 11]

“¼[T]he substantial federal interests in uniform interpretation of agreements under the Convention justify the application of a uniform rule of decision on the question presented. In the absence of a choice‑of‑law provision, we conclude that parties are to be bound to the explicit language of arbitration clauses, with no state‑specific exceptions that would extend otherwise clear contractual deadlines.”

“As the foregoing discussion makes plain, the content of the federal rule we today adopt must provide that, when the parties do not otherwise determine by contract, deadlines included in arbitration agreements under the Convention will admit of no exceptions. Thirty days must mean thirty days. When the end of the thirty days falls on a Saturday, a Sunday, a national holiday or a state or parochial holiday, the parties will be bound nonetheless to comply with the deadline for which they bargained.” [Slip op. 12]

Citation: Certain Underwriters At Lloyd’s London v. Argonaut Insurance Co., 2007 WL 2433139 (7th Cir. 2007).

DEFENSE TREATIES

In action by Chagos Islanders in British Indian Ocean Territory challenging their expulsion from their homeland, English Court of Appeal, Civil Division holds that English government exceeded its constitutional and statutory powers in exiling islanders to make way for United States military base

In 1814, France ceded to Great Britain the Chagos Archipelago in the central Indian ocean south of Maldives, together with some other dependencies. The U. K. constituted the Chagos Islands in 1965 as a separate colony, the British Indian Ocean Territory (BIOT). Orders in Council made in the exercise of the prerogative powers of the Crown ordinarily govern such dependencies.

Under an Immigration Ordinance made in 1971 by the Commissioner for BIOT, the U. K. forcibly exiled the Chagossians mainly to distant Mauritius. The reason was that, in the 1960s, the United States claimed that it needed Diego Garcia, the principal island in the archipelago, as a military base. (The strategic significance of this base is a political judgment which neither party here has challenged.) Incidentally, in 1967, the Crown had acquired the freehold interest in the entire territory of BIOT and in 1983 had declared it to be Crown land.

Pursuant to a lawsuit brought on behalf of the islanders,, a first instance court quashed the 1971 Ordinance in November 2000. It held that the exclusion of an entire population from its homeland under the the BIOT Order 1965 lay outside the purposes of the parent Order in Council. The latter, it said, dealt only with the governance of the population and did not authorize its expulsion. The lower court had quashed only the subsidiary Ordinance and not the empowering Order in Council.

In November 2000, the Foreign Secretary evinced the Government’s “political will” to repatriate the Chagossians to all Islands other than Diego Garcia. The Government said that it was doing feasibility studies looking toward substantial returns by native Chagossians. It declared in part that: “we will put in place a new Immigration Ordinance which will allow the [Chagossians] to return to the outer islands while observing our Treaty obligations [with the United States.] The Government has not defended what was done or said thirty years ago. The new Immigration Ordinance 4 of 2000 accordingly exempted from the need for an entry permit anyone who was a British Dependent Territories citizen by virtue of his or her birth in the BIOT as well as because their parents or grandparents’ were born there.

In 2002, however, the Government feasibility study reported that, while short‑term resettlement was practicable on a subsistence basis, long‑term resettlement would be “precarious and costly”. There was no other suggestion of any resulting change in Government policy.

Then, on June 10, 2004, the ministers placed two Orders in Council before Her Majesty for approval: the BIOT (Constitution) Order 2004 (the Constitution Order) and the BIOT (Immigration) Order 2004 (the Immigration Order). In the first instance court’s words, the first of these Orders “declared that no person has the right of abode in BIOT nor the right without authorisation to enter and remain there. The Chagossians were thus effectively exiled.”

On June 15, 2004, the ministers placed a written statement before the House of Commons, citing the two‑year‑old feasibility study and containing some of the following language. “In effect, therefore, anything other than short‑term resettlement on a purely subsistence basis would be highly precarious and would involve expensive underwriting by the U. K. government for an open‑ended period ‑‑ probably permanently. ...”

“After long and careful consideration we have therefore decided to legislate to prevent it. Equally, restoration of full immigration control over the entire territory is necessary to ensure and maintain the availability and effective use of the Territory for defence purposes, for which it was in fact constituted and set aside in accordance with the U. K.’s treaty obligations entered into almost 40 years ago. Especially in the light of recent developments in the international security climate ... this is a factor to which due weight has had to be given.” [¶ 12]

For these reasons, Her Majesty made two Orders in Council on June 10, 2004. Their combined effect is to restore full immigration control over the BIOT islands. These controls extend to all persons, including members of the Chagossian community.

Thus, despite a candid ministerial acknowledgment to Parliament less than a month later that “the decisions made by successive governments in the 1960s and 1970s to depopulate the islands do not, to say the least, constitute the finest hour of U. K. foreign policy,” [¶ 13] the then Government re‑adopted those decisions in 2004.

The lower court ruled that the provisions of the Orders in Council by which the Crown in 2004 had forbidden the return of the Chagossians to the islands which they or their forebears had inhabited were invalid. For the reasons outlined below, the Court of Appeal (Civil Division) dismisses the Government’s appeal.

As the lead opinion explains, repugnancy as a legislative term means an irreconcilable conflict between two laws. There is no reason to import into the scheme of the Colonial Laws Validity Act of 1865 any departure from the logical principle that, before any question of repugnancy to an Act of the imperial Parliament can arise, a colonial measure has first to be law.

“If an unconstitutional colonial statute is not law — as manifestly it is not — no question of repugnancy arises. The present dispute, equally, is not about whether the Constitution Order is repugnant to a superior statute or other legal provision but about whether it is law. It is accordingly not barred by the 1865 Act.” [¶ 30]

But the Government contends that the powers which Her Majesty in Council exercises when legislating for a colony are the same as those which she may exercise in Parliament — in other words, that they are plenary sovereign powers. The only qualifications Government counsel is prepared to accept are that it must not exercise the power repugnantly to any imperial parliamentary legislation or inconsistently with the principle of territoriality.

The question now to be decided is whether there are today at common law any larger constraints upon the prerogative power to legislate for the colonies. As Mr. Anson stated the point simply in his Law and Custom of the Constitution (3rd ed, 1907), II.i, p.41: “The position of affairs has been reversed since 1714 [namely, the accession of George I]. Then the King or Queen governed through Ministers, now Ministers govern through the instrumentality of the Crown.” Or as Lord Diplock put it in Council of Civil Service Unions v. Minister for the Civil Service [1985] A.C. 374, 409 [the CCS case]: “... in the absence of any statute regulating the subject‑matter of the decision, the source of the decision‑making power may still be the common law itself, i.e. that part of the common law that is given by lawyers the label of ‘the prerogative’. Where this is the source of the decision‑making power, the power ... in constitutional practice is generally exercised by those holding ministerial rank.” If this is correct, the Court notes (and modern authority has often held that it is), any amenability to judicial review in relation to the use of the royal prerogative is that of ministers, not of the Monarch. Note also the practice of having the ministers give an account to Parliament of the measures which have brought them about.

“The only acceptable answer, in my judgment, is that an Order in Council is an act of the executive and as such is amenable to any appropriate form of judicial review, whether anticipatory or retrospective. What determines the constitutional status of a measure — a statute, a judgment or an order — is not its formal authority, which is always that of the Crown, but its source in the interlocking but unequal limbs of the state.”

“One aspect of this structure, determined by the historic compromise reached in the course of the 17th century, is that both the courts and the executive will treat the authority of Parliament, duly exercised, as absolute. Another aspect, upon which both democratic governance and the rule of law depend, is that the courts will respect all acts of the executive within its lawful province, and that the executive will respect all decisions of the courts as to what its lawful province is. [Cite].”

“This case, correspondingly, concerns not a sovereign act of the Crown but a potentially justiciable act of executive government. Were we to hold otherwise, we would be creating an area of ministerial action free both of Parliamentary control and of judicial oversight, defined, moreover, not by subject‑matter but simply by the mode of enactment. The implications of such a situation for both democracy and the rule of law do not need to be spelt out.” [¶¶ 35‑36]

“Next, there can be no doubt that the courts will not allow the power to be used corruptly: if, for example, it were to be proved that a minister (or one of his or her advisers) had been bribed to include a particular provision in a colonial Order in Council, the Order would be wholly or in part struck down. An Order in Council permitting the use of torture to obtain evidence would today fall under the 1865 Act as being repugnant to an imperial statute (the Criminal Justice Act 1988, § 134 ), but, even before 1988, the courts of this country would surely have struck it down, whether on the public law ground articulated by Lord Diplock in CCS that it was irrational in its defiance of accepted moral standards, or on Lord Mansfield’s ground in Campbell v. Hall (1774) 1 Cowp. 204, 209 that it was ‘contrary to fundamental principles’.”

“The same would almost certainly be the case with an Order in Council abolishing all recourse to law in a colony or introducing forced labour. These instances of legitimate judicial intervention to prevent the abuse of prerogative power by executive government go considerably wider than the government’s argument before us has allowed.”

“The modern locus classicus is in the speech of Lord Scarman in CCS at 407: ‘It is, of course, beyond doubt that, in Coke’s time and thereafter, judicial review of the exercise of prerogative power was limited to inquiring into whether a particular power existed and, if it did, into its extent. [Cite]. But this limitation has now gone, overwhelmed by the developing modern law of judicial review [Cites].’”

“‘Just as ancient restrictions in the law relating to the prerogative writs and orders have not prevented the courts from extending the requirement of natural justice, namely the duty to act fairly, so that it is required of a purely administrative act, so also has the modern law, ... extended the range of judicial review in respect of the exercise of prerogative power. Today, therefore, the controlling factor in determining whether the exercise of prerogative power is subject to judicial review is not its source but its subject matter.’” [¶ 38]

“[Government counsel’s] reasoning therefore tells us nothing definite in a case such as the present, which concerns an unprecedented use, or purported use, of the power of colonial governance. It will be necessary to consider in due course how wide the power to provide for ‘the peace, order and good government’ of a colony is, and whether the courts can go behind the executive’s assertion that it is the end to which a measure is directed. But in my judgment there is no legal basis for any prior restriction on the grounds upon which executive acts carried out by Order in Council may be judicially reviewed. Provided the subject‑matter is apt for adjudication, any abuse of power in the making or the operation of such an instrument is in principle justiciable. So I come back to the question whether colonial governance is one of the prohibited categories of subject‑matter.” [¶ 43]

The lead opinion then addresses the question whether matters of colonial governance is subject to judicial review. “Prerogative powers such as those relating to the making of treaties, the defence of the realm, the prerogative of mercy, the grant of honours, the dissolution of Parliament and the appointment of ministers as well as others are not, I think, susceptible to judicial review because their nature and subject matter are such as not to be amenable to the judicial process....”

“The Government contends that the omission of colonial governance from the list of unreviewable uses of the royal prerogative is an oversight. That seems unlikely. But it would be a mistake to jump to the opposite conclusion that their Lordships considered the colonial governance power to be within the reach of judicial review. It is likelier that it was left for decision when it arose, which is now. [¶¶ 44‑45]

The lead opinion decides that the use of the prerogative power of colonial governance enjoys no generic immunity from judicial review. “What are immune, ... are prerogative measures lawfully enacted and rationally capable of addressing the ‘peace, order and good government’ of the colony.” [¶ 47]

The next question is whether § 9 of the Constitution Order, and with it the Immigration Order, was lawfully made. “Section 4 of the Ordinance effectively exiles the [Chagossians] from the territory where they are belongers and forbids their return. But the ‘peace, order, and good government’ of any territory means nothing, surely, save by reference to the territory’s population. They are to be governed: not removed. ... Short of [a catastrophe], I cannot see how the wholesale removal of a people from the land where they belong can be said to conduce to the territory’s peace, order and good government.”

“The people may be taxed; they should be housed; laws will criminalise some of the things they do; maybe they will be tried with no juries, and subject to severe, even brutal penalties; the laws made for their marriages, their property, and much besides may be far different from what obtains in England. All this is vouchsafed by the authorities.”

“But that is not all the learning gives. These people are subjects of the Crown, in right of their British nationality as belongers in the Chagos Archipelago. As Chitty said in 1820, the Queen has an interest in all her subjects, who rightly look to the Crown — today, to the rule of law which is given in the Queen’s name — for the security of their homeland within the Queen’s dominions.”

“But in this case they have been excluded from it. It has been done for high political reasons: good reasons, certainly, dictated by pressing considerations of military security. But they are not reasons which may reasonably be said to touch the peace, order and good government of BIOT, ... In short, there is no principled basis upon which § 4 of the Ordinance can be justified as having been empowered by § 11 of the BIOT Order. And it has no other conceivable source of lawful authority.” [¶ 54]

The lead opinion then addresses the question of abuse of power. “... [O]n its merits, the enactment of § 9 of the Constitution Order was irrational. This was because, ... it was in right of the BIOT — and not of the United Kingdom — that Her Majesty made the two Orders. It follows that the United Kingdom’s own interests, a fortiori those of the United States, could play no legitimate part in determining what was appropriate to the good government of the BIOT.” [¶ 57]

“Few things are more important to a social group than its sense of belonging, not only to each other but to a place. What has sustained peoples in exile, from Babylon onwards, has been the possibility of one day returning home. The barring of that door, however remote or inaccessible it may be for the present, is an act requiring overwhelming justification.”

“It follows, in our judgment, that § 9 of the Order is irrational on public law grounds and ... must be quashed for this reason. Made by the Queen in right of BIOT, the Order is, on its face, not concerned with the interests of BIOT, but with the interests of the United Kingdom and of the United States. ... [T]he validity of the Order in Council made by the Queen in right of BIOT has to be tested by reference to the interests of BIOT. This Order in Council conspicuously does not do that.”

“What is being addressed by all these arguments, and by the argument on legitimate expectation too, is the abuse of power. This is what the courts of public law are there to identify and, in proper cases, to correct. [Cite] Power may be abused in a variety of ways, of which acting beyond the limits of the power is one, acting irrationally is another, acting for an improper purpose is a third and acting so as to frustrate a legitimate expectation is a fourth; and there are more, both procedural and substantive. Very commonly they run into one another. ...”

“Particularly when one is considering an allegation of abuse of the prerogative power, the search for categories of abuse may therefore be less important than the search for principle; for, ... the remarkable decisions of the courts in the later 20th century that judicial review runs to prerogative and self‑constituted bodies were prompted by the courts’ determination to act in defence of the citizenry against abuse of power by important bodies of a governmental or quasi‑governmental nature ... and not to let them escape merely because of their non‑statutory character.”

“Correspondingly, what the court is in essence invited to do in the present case is to hold that the making of § 9 of the Constitution Order, and of the entire Immigration Order, was an abuse of the prerogative power of the Crown because the Crown’s common law powers do not extend to the exiling of an entire population. If this is right, categorising it as an ultra vires act or as an irrational one or as a breach of a legitimate expectation is an important matter of legal taxonomy but not critical to the finding of legal fault.” [¶ 60]

“The governance of each colonial territory is, in constitutional principle, a discrete function of the Crown. That territory’s interests will not necessarily be the interests of the United Kingdom or of its allies. This is not to say that the two things are mutually exclusive: they will often, perhaps usually, be interdependent, so that the defence of a colony from attack, and even its use as a base to protect the United Kingdom, may serve both its and the United Kingdom’s interests.”

“But that is not the case here. ... the permanent exclusion of an entire population from its homeland for reasons unconnected with their collective wellbeing cannot have that character and, accordingly, cannot be lawfully accomplished by use of the prerogative power of [colonial] governance.” [¶ 67]

“The single ground given in § 9(1) of the Order itself for exiling the population is strategic. ... The desire of the United States administration, reiterated in statements made for the purpose of these proceedings, to keep the whole archipelago cleared of its population invites, but does not require, scrutiny because it is not connected with the governance of the Chagos Islands. It is connected with the United States’ strategic and geopolitical interests and with the United Kingdom’s support for these, both of them ... in direct conflict with the interests of the Chagossians.” [¶ 69]

“The prospective cost to the British taxpayer of resettling the next generations of the population (which the British taxpayer paid to remove) is in my view a mare’s nest. While resettlement will doubtless be difficult or even impossible without capital expenditure, it is not suggested on either side that the United Kingdom is under any obligation to fund it. As I have said, it is the bolting of the door to the Chagossians’ home, not the failure to provide transport there or to refurbish it, which is in issue. Indeed the Crown has rights as landowner which are capable, for the present, of answering any attempt to resettle there ...”

“The point is that the two Orders in Council negate one of the most fundamental liberties known to human beings, the freedom to return to one’s homeland, however poor and barren the conditions of life, and contingent though return may be on the property rights of others; and that they do this for reasons unconnected with the wellbeing of the people affected.” [¶ 71]

The final aspect of abuse of power addressed by the lead opinion is the frustration of a substantive legitimate expectation. “The present case resembles , a lawfully made promise of a substantive benefit (substantive, that is, as opposed to procedural). In my judgment, ... to frustrate the expectation which the Chagossians from November 2000 legitimately entertained of being at liberty one day to return to their homeland was so profoundly unfair, in the absence of relevant and overriding policy imperatives, as to be an abuse of power.” [¶ 73]

“The statement made by way of explanation of the two Orders now under challenge cited non‑feasibility of resettlement and ‘the availability and effective use of the Territory for defence purposes’. ... [N]o evidence has been advanced to show that anything had changed between 2000, when there was apparently no defence problem and no insuperable issue of feasibility, and

2004. In the result, the Crown has not begun to establish an overriding imperative entitling it to frustrate the Chagossians’ expectation that they would at least continue to have the status of belongers.”

“The two letters written by the United States’ administration for the purposes of these proceedings cannot affect this issue. The United States was not the author of the Orders in Council, and nothing has been deposed to by those who were to establish that these were new and overriding concerns which entitled the U. K. government to renege on its undertaking to the Chagossians.” [ ¶ 76]

“Notwithstanding the great latitude which the prerogative power of colonial governance enjoys, I consider the material Orders to have been unlawfully made, because both their content and the circumstances of their enactment constitute an abuse of power on the part of executive government. ... I would dismiss the Government’s appeal.” [¶¶ 78,79]

[The remaining two judges concur but state their grounds in separate opinions.]

Citation: Secretary of State v. The Queen (on application of Bancoult), Case No: C1/2006/1465; [2007] E. W. C .A. Civ. 498; 2007 WL 1472036 (CA (Civ. Div.), May 23, 2007).

ECONOMIC SANCTIONS

Second Circuit holds that fine assessed against U.S. Citizen for her travel to Iraq in violation of Iraqi Sanctions Act did not infringe her free speech rights or deny her due process

Judith Karpov (Plaintiff), a United States citizen, traveled to Iraq in 2003 in order to act as a “human shield” to prevent the bombing of civilian infrastructure. The Plaintiff claims she went to Iraq as an ordained minister, a professional journalist and as a human shield.

The United States Treasury sent Plaintiff a letter requiring that she provide a detailed written report concerning her trip to Iraq. Plaintiff responded to the letter but failed to provide an itemized list of travel related expenses. Defendant assessed a fine of $6,700 against Plaintiff for violating several executive orders and U.S. Treasury Department regulations that governed what interactions U.S. citizens could have with Iraq while economic sanctions were in place.

Plaintiff filed suit in federal court alleging violation of her First and Fifth Amendment rights. The district court dismissed Plaintiff’s complaint. She then appealed to the U.S. Court of Appeals for the Second Circuit, which affirms the district court.

In 1990, Congress passed the Iraqi Sanctions Act. It directed the President to ‘continue to impose the trade embargo and other economic sanctions with respect to Iraq.’ Pub. L. No. 101‑513, § 586C(a), 104 Stat. 1979, 2048 (1990). President Bush issued Executive Orders on the assumption that Iraqi government policies pose an unusual and extraordinary threat to the national security of the United States, and thus imposed economic sanctions be imposed on Iraq. The Secretary of the Treasury promulgated regulations implementing prohibitions on, inter alia, the exportation of services and certain travel to Iraq. See Exec. Order No. 12,722, 55 Fed. Reg. 31,803 (Aug. 2, 1990); Exec. Order No. 12,724, 55 Fed. Reg. 33,089 (Aug. 9, 1990).

The Foreign Assets Control Office (OFAC.) of the U.S. Treasury Department issued the Iraqi Sanctions Regulations (Regulations) on January 18, 1991, to carry out the bans in the President’s Executive Orders, and to set up procedures for handling violations.

“On February 19, 2003 [Plaintiff] arrived in Iraq and remained there until March 9. [Defendant] did not obtain a license that might have authorized her, despite the economic sanctions, to engage in travel‑related transactions involving Iraq. While there, Plaintiff acted as a preemptive human shield.”

“Although [Plaintiff] left the country before the U.S. bombing campaign actually began, she was near an oil refinery while in Iraq. [Plaintiff] also went on guided tours in Barra and Baghdad, visited hospitals and schools, and spent time ‘looking, listening, talking, and writing.’ Her writing took the form of four letters sent back to America that were printed in installments by the “Jersey Journal.” The [OFAC.] learned of [Plaintiff]’s unauthorized trip from press accounts.” [Slip op. 3‑4]

The Circuit Court first discusses the Plaintiff’s claims under the Administrative Procedure Act.[APA]. On the APA’s “arbitrary and capricious” standard, the Circuit Court stated “In other words, so long as the agency examines the relevant data and has set out a satisfactory explanation including a rational connection between the facts found and the choice made, a reviewing court will uphold the agency action, even a decision that is not perfectly clear, provided the agency’s path to its conclusion may reasonably be discerned. [Cite].” [Slip op. 6]

“The three transactions [Plaintiff] was accused of were: (1) attempting to collect funds for travel expenses to/from/within Iraq, (2) departing Jordan for Iraq and arriving in Iraq, and (6) purchasing food while in Iraq. It was not arbitrary and capricious for the [OFAC.] to determine that [Plaintiff] had engaged in these three transactions. [Plaintiff]’s own letter indicated that she solicited small donations to help finance her travel expenses to Iraq¼”

“[Plaintiff] admitted ... that she traveled to Iraq during the winter of 2003. Insofar as the purchase of food in Iraq is concerned, [Plaintiff] conceded in an article she submitted to the “Jersey Journal” that, although she was not paying for living expenses during her first week in Iraq, she expected her group would start paying its way once they got organized.” [Slip op. 6‑7]

“¼[W]e need not determine the exact contours of the conduct for which appellant was fined, since the [OFAC.] could have fined her $6,700 for committing any one of the six alleged acts. See 31 C. F. R. § 575.701. Thus, it is unnecessary to consider whether the services provided by [Plaintiff] to Iraq could have served as an alternative basis for this penalty.”

“¼[I]n Plaintiff is correct that some of the transactions she engaged in in Iraq related to journalistic activities and thus were exempted from sanction by § 575.207, remand on that basis would be futile. ¼ Plaintiff overlooks § 575.416( c), which notes that ‘[authorised travel transactions are limited to those incident to travel for the purpose of collecting and disseminating information for a recognized newsgathering organization, and do not include travel transactions related to any other activity in Iraq’. [Plaintiff] admits that, among her activities within Iraq, were excursions to ‘defend Iraqi civilian infrastructure from bombing.’ Such activity clearly would not fall within the journalistic exception, and thus we are confident the Agency would reach the same conclusion even were we to determine that some of [Plaintiff]’s activities in Iraq were exempted by the journalistic exception.” [Slip op. 7]

The Circuit Court then rejects Plaintiff’s Due Process claims. Addressing the Defendant’s notice and an opportunity to be heard, the Court declares: “[t]he Agency’s procedural safeguards guaranteed that, prior to fining [Plaintiff], the [OFAC.] informed her of its tentative assessment, explained to her the basis for that assessment, provided her with a summary of the evidence it considered relevant, and offered her an opportunity to respond in a written presentation. [Cite].” [Slip op. 9‑10]

The Court then spurns the Plaintiff’s Fifth Amendment right‑to‑travel claims. “[T]he right to travel internationally is simply an aspect of the liberty protected by the Due Process Clause of the Fifth Amendment, and as such may be regulated within the bounds of due process¼the Iraqi Sanctions Act of 1990, declared that the ‘policies and actions of the Government of Iraq constitute an unusual and extraordinary threat to the national security and foreign policy of the United States,’ and therefore ordered that transactions by United States citizens relating to travel to Iraq be prohibited. Exec. Order No. 12,722, 55 Fed. Reg. 31,803 (Aug. 2, 1990). Since the restriction on engaging in such transactions was based on these concerns of foreign policy, the travel restriction was not a violation of [Plaintiff]’s liberty interests under the Fifth Amendment’s Due Process Clause.” [Slip op. 11]

Finally the Circuit Court sees no merit in the free speech issue. “Under the First Amendment, a restriction against traveling to a specified country is ‘an inhibition of action,’ not speech. Zemel v. Rusk, 381 U.S. 1, 16 (1965). As the Zemel Court explained, many restrictions on action could ‘be clothed by ingenious argument in the garb of decreased data flow.’ Id. at 16‑17. Yet such arguments are to no avail since the First Amendment guarantees a citizen the right to speak and publish, but does not guarantee an unrestrained right to gather information. Id. at 17. [Plaintiff] was fined because of her actions in violating the travel regulations, not for her speech. Consequently, her First Amendment rights were not violated.” [Slip op. 11]

Citation: Karpov v. Snow, 2007 WL 2302015 (2d Cir. 2007).

EUROPEAN UNION (EXTERNAL AFFAIRS)

European Court of Justice rules that, in making side arrangements with United States on air fares and computerized reservation systems, Netherlands acted in area of external relations reserved to EU itself

In 1957, the Netherlands entered into an Air Transport Agreement (ATA) with the United States dealing, inter alia, with air fares and rates and Computerized Reservation Systems (CRSs). A protocol of March 31, 1978 and an exchange of notes on October 13 and December 22, 1987, an exchange of notes of January 29 and March 13, 1992 and an exchange of notes of October 14, 1992 either added to, or amended, the ATA.

 In 2004, the EC Commission brought the present action; it asked for a declaration that, by contracting or maintaining in force [the ATA], despite the renegotiation of international commitments towards the United States, the Netherlands had failed to fulfil its obligations under Art. 5EC (now Art. 10 ) and Art.52EC (now, after amendment, Art. 43) and Regulations

2409/92 and 2299/89, as amended by Regulation 3089/93.

In its defense, the Netherlands argued inter alia that, pre‑dating January 1, 1958, Art. 307(1)EC covered the 1957 ATA. It provided that the EC Treaty did not affect rights and obligations arising from agreements between Member States and third countries entered into before January 1, 1958 or, for acceding States, before the date of their accession. It argued that the same principle applied to later secondary legislation; that is, that the mere existence of that legislation did not have the effect of requiring a Member State to terminate commitments towards non‑Member States.

The ECJ then addressed the admissibility of the Commission’s action. In the first place, under some circumstances, the inordinate length of the pre‑litigation procedure laid down in Art.226 EC could make it too hard for the Member State in question to rebut the Commission’s arguments, thus impairing the rights of the defense. Here, however, the Netherlands Government has not convinced us that the unusual duration of the procedure had had any effect on the manner in which it had organized its defense. Secondly, the procedure to secure a declaration of a Member State’s failure to carry out its legal obligations rested on the objective finding that a Member State had failed to fulfil its duties under Community law. Moreover, a Member State could not cite the principle of “protection of legitimate expectations” in a case such as this, to bar an objective finding of its failure to carry out its EC Treaty obligations or duties imposed by secondary legislation. To admit that justification would conflict with the goal pursued by the Art. 226EC procedure.

Third, the Court is to apply the provisions of Art. 226EC without requiring that the Commission comply with a fixed time limit. In any event, the Commission did not abuse the discretion granted to it under Art. 226EC in a manner contrary to the Treaty.

Finally, the Court has to decide whether a Member State had failed to fulfil its obligations by reference to the situation existing in the Member State at the end of the period laid down in the reasoned opinion. The Court could not take into account any later changes.

The amendments made in October 1992 to the 1957 Agreement created new and substantial international commitments for the Netherlands. Those amendments indicated a renegotiation of the whole 1957 Agreement. In such a case, this prevented the other Member States not only from entering into new international commitments but also from keeping such commitments in force if

they violated Community law. Furthermore, the amendments made in October 1992 to the 1957 Agreement as a whole affected the scope of certain provisions which the parties either did not formally amend, or did so only in a limited way.

As a result, the present Court has to assess all the international commitments challenged in this action in relation to the provisions of Community law cited by the Commission in support of this action. It follows from that analysis that the argument of the Netherlands Government based on Art. 307(1)EC was groundless. Since Regulation 2409/92 went into effect, the Netherlands had no longer been entitled, despite the renegotiation of the 1957 Agreement, to enter on its own into, or to maintain in force, international commitments as to the fares and rates the carriers of non‑Member States could collect on intra‑Community routes. A commitment of that type arose from Art. 11 of the 1957 Agreement, as amended by the Exchange of Notes of January 29 and March 13, 1992 and by Art.6 of the 1978 Protocol.

The Netherlands had kept up that commitment despite the renegotiation of the 1957 Agreement which led to the Exchange of Notes of October 1992. By taking that course of action, the Netherlands had invaded the Community’s exclusive international competence set forth in Art. 1(3) of Regulation 2409/92. Regulation 2299/89 gave the Community the sole competence to enter into agreements with non‑Member States with respect to the obligations relating

to CRSs offered for use, or used on, its territory. By the Exchange of Notes of January 29 and March 13, 1992, the Netherlands and the United States added to the 1957 Agreement an annex dealing with the principles pertaining to CRSs including those applying to CRSs offered for use, or used on, Netherlands territory. The Netherlands retained that Annex in force despite the renegotiation of the 1957 Agreement which leto the Exchange of Notes of October 1992. In so doing, that Member State infringed the exclusive external competence of the Community arising from Regulation 2299/89.

In addition, Art. 5EC (now Art. 10) required Member States to promote the achievement of the Community’s tasks and to avoid taking any measure which could threaten the realization of the EC Treaty’s goals. In the area of foreign relations, letting Member States enter into international commitments capable of affecting rules adopted by the Community or of altering their scope would compromise the Community’s tasks and objectives under the EC Treaty.

Even if the Exchange of Notes of October 1992, did not formally make make large changes in Art. 4 of the 1957 Agreement, the Exchange did profoundly alter its content and scope. It followed (1) that we have to evaluate that Article under the provisions of Community law which the parties had invoked, (2) that the Netherlands Government’s reliance on Art. 307(1) EC lacked merit.

Article 52 (now Art. 43) EC applies in the air transport sector; in particular it applies to airlines established in a Member State that offer air transport services between a Member State and a non‑Member State.

Article 4 of the 1957 Agreement did not square with Art. 52EC (Art. 43). Article 4 could always bar other Community airlines from the benefit of the 1957 Agreement, while according that benefit to Netherlands airlines. As a result, Community airlines suffered discrimination that prevented them from advantaging from the treatment which the Netherlands granted to its own nationals.

“In those circumstances, it is apparent that the [Commission’s] claim that the Netherlands has failed to fulfil its obligations under [former] Art. 52 of the Treaty is well founded. Having regard to the whole of those considerations, the Court must conclude that, by contracting or maintaining in force, despite the renegotiation of the 1957 Agreement, international commitments towards the United States: [a] concerning air fares and rates charged by carriers designated by the United States on intra‑Community routes; [b] concerning CRSs used or offered for use on Netherlands territory; and [c] recognising the United States as having the right to withdraw, suspend or limit traffic rights in cases where air carriers designated by the Netherlands are not owned by the latter or by Netherlands nationals, the Netherlands has failed to fulfil its obligations under Arts 5 and 52 of the Treaty, and under Regulations 2409/92 and 2299/89.” [¶¶ 91‑92]

Citation: Re Dutch Air Transport Agreement: Commission of European Communities v. Netherlands (Case C ‑ 523/04) (Eur. Ct. Just., [Gr. Ch.], April 24, 2007).

VENUE

Fifth Circuit finds English forum selection clause in agreement with shipping contractor enforceable not‑withstanding Defendants’ intention to appear as claimants in U.S. jurisdiction

Trifigura Beheer B.V. (Plaintiff) contracted with Probo Elk Shipping Inc. and Laurin Tankers America Inc. (Defendants) to transport naphtha from Algeria to the Netherlands by ship. The contract had contained a Forum Selection Clause [FSC] giving jurisdiction over any claims to the High Court of London. The Dutch buyer rejected the shipment, claiming contamination.

Plaintiff alleges that the cargo was in good condition when it was loaded on board the ship in Algeria. The cargo was next rerouted to Houston, Texas, where Plaintiff had arranged for a third party to buy the cargo. Plaintiff filed suit in a Texas federal court asserting jurisdiction in rem. To avoid arrest of the ship, the underwriters entered into a letter of undertaking (LOU), agreeing to appear as claimants in the suit.

The district court, however, dismissed for improper statutory venue. The Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit which affirms the dismissal.

“Defendants submitted to the [lower] court’s jurisdiction by virtue of the LOU, which specifically established that jurisdiction would exist in the same manner as if the ship had been arrested and Defendants had appeared as claimants. But a party’s mere appearance as a claimant does not waive venue¼ the ‘jurisdictional’ language of the [FSC] does not oust the personal or in rem jurisdiction of the American court¼the parties may not a priori restrict the court’s statutorily established basic power to assert jurisdiction by their mutual consent¼it only renders it legally improper for the American court to do more with its jurisdiction than to evaluate the [FSC’s] enforceability.” [Slip op. 2‑3]

“The language of the LOU was entirely consistent with the charter party’s [FSC] and did not supersede it. Rather, the claimants properly appeared before the district court as if their ship had been arrested, and the court properly dismissed for improper venue after finding that the [FSC] was enforceable.”

“[Plaintiff] contends that dismissal was unfair because, under British law, its claim would be time‑barred in London. But [Plaintiff’s] failure to plead and prove foreign law below is fatal to its claim. [Cf. F. R. Civ. P. 44.1] ... [Plaintiff] occasioned its own predicament by failing timely to file its claim in the contractually specified forum; no policy against unfairness counsels in favor of rewarding such behavior by adjudicating this case in a forum that would otherwise be contractually barred.” [Slip op. 3]

“[Plaintiff] claims [that] Defendants waived the [FSC] issue by failing to make a timely pre‑answer motion. ... The Court held, however, that the “[d]efendants complied with this rule by raising their objections to the forum in their answer, which was their first responsive pleading to the complaint.” [Slip op. 4]

Citation: Trafigura Beheer B.V. v. M/T Probo Elk, 2007 WL 2033336 (5th Cir. 2007).

SOVEREIGN IMMUNITY

Sixth Circuit holds that U.S. courts do not have jurisdiction under “commercial activity exception” of Foreign Sovereign Immunities Act where Republic of Lebanon disqualified U.S. Company from bidding on contract with Lebanon and performance of contract was to be completed in Lebanon

American Telecom Company, LLC and American Telecom Group‑USA, LLC (Plaintiffs) bid for a contract to manage cellular telephone networks in the Republic of Lebanon (Defendant). Plaintiff paid $25,000 to take part in an Auction Tender, but was disqualified without explanation. Defendant cancelled the Auction Tender in favor of a New Public Tender and persuaded Plaintiffs to pay another $5,000 to take part, assuring fairness and good faith. Plaintiffs submitted documents that conceded that the bidding would not be binding on Defendant.

Plaintiff spent over $500,000 preparing its bid with the Tender Information Procedures (TIP) document. It was also required to tender a $2 million bond. The TIP specified that, “The Republic of Lebanon reserves the right to reject the offer to manage either of the Mobile Businesses through the Tender, and to discontinue the Tender at any time for any reason.”

Plaintiff submitted several documents via e‑mail, including the tender bond (allegedly

with verbal approval by a Lebanese employee). Defendant ended up disqualifying Plaintiff because the tender bond was an e‑mail rather than an original document.

Plaintiff filed suit in federal court. Jurisdiction rested on 28 U.S.C. § 1330, part of the Foreign Sovereign Immunities Act of 1976 (FSIA). When Defendant failed to file an answer, the court entered a $420 million default judgment against it.

Counsel for Defendant eventually filed a special appearance and moved to set aside the judgment and dismiss for lack of subject matter jurisdiction. The court granted both motions. Plaintiff appealed to the U.S. Court of Appeals for the Sixth Circuit which affirms.

Addressing the jurisdictional issues, the Circuit Court explains that, under the FSIA, “¼the court presumes immunity [of the foreign state] (§ 1604) but looks for an exception (§§ 1605‑07); then, only if the court finds that the foreign state is not entitled to immunity will the court have subject matter jurisdiction (§ 1330(a)).”

“The House Report on the Act states that sovereign immunity is an affirmative defense that must be specially pleaded,’ H.R. Rep. No. 94‑1487, at 17. Under the Act, however, subject matter jurisdiction turns on the existence of an exception to foreign sovereign immunity. Accordingly, even if the foreign state does not enter an appearance to assert an immunity defense, a District Court still must determine that immunity is unavailable under the Act.”

“The ordinary principles of subject matter jurisdiction still apply when jurisdiction is premised on an exception to the FSIA ‑ I. e., an order entered by a court that lacks subject matter jurisdiction is a nullity and the court’s only recourse is to dismiss the case¼” [Slip op. 5]

Turning to the “commercial activity exception” to FSIA, the Court states that, “[t]here is no dispute that Lebanon is a foreign state, see § 1603(a), or that the bidding for the cellular telephone management contracts was a ‘commercial activity,’ see § 1603(d), that occurred outside the United States. The [statutory] question is whether it caused a ‘direct effect’ in the United States, ...” [Slip op. 6]

“[A]n effect is direct if it follows as an immediate consequence of the defendant’s activity. Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618 (1992). Of course, the generally applicable principle de minimis non curat lex ensures that jurisdiction may not be predicated on purely trivial effects in the United States. But we reject the suggestion that § 1605(a)(2) contains any unexpressed requirement of ‘substantiality’ or ‘foreseeability.’ Id.”

“¼[T]he only immediate consequence of [Defendant’s] activity was [Plaintiffs’] disqualification from the short list of qualified bidders; everything else is entirely derivative of that action, and therefore not an ‘immediate consequence’ and not a direct effect. Under [Plaintiffs’s] theory, the direct effect requirement [would be] effectively excised from the statute because, ... any bidding process conducted — or not conducted — anywhere in the world would have a direct effect in the United States.” [Slip op. 8]

“We hold that the mere act of including an American company in, or excluding an American company from, the process of bidding on a contract, where both parties’ performance is to occur entirely in a foreign locale, does not, standing alone, produce an immediate consequence in the United States, and therefore, does not ‘cause a direct effect in the United States’ for purposes of 29 U.S.C. § 1605(a)(2).” [Slip op. 9]

Citation: American Telecom Co., L.L.C. v. Republic of Lebanon, 2007 WL 2428412 (6th Cir. 2007).

Japanese high court upholds local company’s resort to “poison pill” to discourage takeover by New York fund. On August 7, the Supreme Court of Japan ruled in favor of Bull‑Dog Sauce Co.’s “poison pill” set up last month to counter New York‑based Steel Partners Japan Strategic Fund’ (SPJ)’s unsolicited takeover bid by diluting SPJ’s existing stake in Bull‑Dog. (Generally, a “poison pill” is any financial tactic or provision a company may adopt to make a hostile takeover attempt prohibitively expensive or otherwise less desirable. — The Editors.) SPJ recently asked the Japanese courts to block Bull‑Dog’s anti‑takeover plan, claiming that it was discriminatory and contrary to Japanese law. Preferring management by consensus, Japan has long disapproved of corporate takeovers because they tend to bring about conflict. Local critics typically characterize funds like SPJ as short‑term opportunists, driving up stock prices and then cashing in. Nevertheless, under pressure from foreign investors, by 2006 mergers and acquisitions had increased over tenfold the number in 1985. Nowadays, Japanese shareholders are less accepting of relatively low dividends and share prices. Management thus may often feel compelled to raise dividends, buy back shares and boost stock prices. Citation: Associated Press (online), Tokyo, Japan, filed Wednesday, August 8, 2007 at 08:28:29Z.

Indonesian high court awards damages against Time Magazine for defaming family of Suharto. In its May 1999 cover story, the Asian edition of Time Magazine reported that the family of former Indonesian autocrat, Haji Mohammad Suharto, had accumulated $15 billion dollars during his 32‑year rule. The story claimed that the family had transferred most of these funds from Switzerland to Austria before riots and pro‑democracy charges of widespread rights abuses led Suharto to step down in 1998. Suharto had filed a defamation suit in the Central District of Jakarta and later the Jakarta High Court, both of which had ruled in Time’s favor. A panel of three Supreme Court judges (including a retired general who rose to high rank under Suharto’s regime), however, reversed the lower courts on August 31, 2007. It also assessed $106 million in damages. Time Inc., the magazine publishing division of media giant, Time Warner Inc., owns Time Magazine. Prior to the recent ruling, Time Inc. had asserted that it had based its article on four months of investigations in 11 countries. These had allegedly disclosed an intricate network of Suharto’s corporate investments, bank transfers and property holdings in Switzerland, Uzbekistan and Nigeria. Citation: The Associated Press (online), Jakarta, Indonesia, Tuesday, September 11, 2007 at 1:35:52Z (Ali Kotarumalos, AP writer).

U.S. announces its ratification of Pacific Ocean Fisheries Convention. In June 2004, the Western and Central Pacific Fisheries Convention entered into force. It established, inter alia, a Commission as an important regional fishery management organization, the first of its kind in the area specified. Through the work of the Commission, various nations, including Australia, Canada, China, Japan, New Zealand and Pacific Island States have been working together to reach the goal of ensuring the long‑term conservation and sustainable use of highly migratory fish stocks in the west and central Pacific. While the Commission focuses mainly on tuna species, it also seeks to reduce the inadvertent catch of sea birds and sea turtles by commercial fisheries and has adopted measures to improve compliance with, and enforcement of, fisheries regulations. The U.S. officially became a Contracting Party to the Convention and a member of the Commission on July 27, 2007. The U.S. submission to the Convention Depository in New Zealand also included a declaration that American Samoa, Guam and the Northern Mariana Islands will join the Commission as Participating Territories. Citation: Media Note #2007/528; Office of the Spokesman, U.S. Department of State, Washington, D.C., released June 28, 2007.