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

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

2001 International Law Update, Volume 7, Number 3 (March).

ARBITRATION

Second Circuit enforces clause in charter party between Texas shipping corporation and Chinese state-owned proprietor of vessel which required arbitration of charter disputes in London pursuant to English law

U.S. Titan, Inc. (Titan) is a Texas corporation with its principal place of business in Pelham, New York. Guangzhou Zhen Hua Shipping Co., Ltd. (Zhen Hua) is a Chinese state-owned corporation mainly engaged in the shipping business with its principal place of business in Guangzhou (formerly Canton), China.

Titan and Zhen Hua began negotiating a time charter of the M/T BIN HE, a vessel owned by Zhen Hua, in August 1995.

[Editorial Note: A charter party is a written contract by which an entire ship or some principal part thereof is leased to a merchant. A “time charter” is a type of charter party under which the charterer engages for a fixed period of time a vessel, manned and navigated by the vessel owner, to carry cargo wherever the charterer instructs.]

In September 1995, the parties agreed in essence to a charter of the BIN HE for a period of six months at $15,250 per day followed by an optional twelve month period at $15,750 per day. They used the “Shelltime 4 Time Charter,” a standard form, which provided for arbitration of disputes in London at the election of either party.

Titan petitioned a New York federal court in February 1996 to compel arbitration pursuant to Section 4 of the Federal Arbitration Act. Preliminarily to this, Titan alleged that the court must first decide the question of whether the charter agreement that required arbitration was itself a valid contract. If the court concludes that the charter is valid and binding, it should then direct Zhen Hua to arbitrate any remaining issues (including damages) pursuant to the terms of the charter.

In October 1996, Zhen Hua moved (1) to dismiss for lack of subject matter jurisdiction under the Foreign Sovereign Immunities Act of 1976 (FSIA) and because it alleged that there was an ad hoc agreement to arbitrate whether the charter party was binding; (2) to dismiss for lack of personal jurisdiction over Zhen Hua; and (3) to dismiss for improper venue.

In two opinions, the district court denied Zhen Hua’s motions to dismiss, ordered arbitration in London pursuant to English law, and ruled that one of the issues the arbitrators may determine is whether the actions of either party after entering into the charter party has vitiated the agreement. Zhen Hua filed an appeal. The U.S. Court of Appeals for the Second Circuit, however, affirms.

Zhen Hua argued that the district court erred in failing to find the existence of an ad hoc side agreement to leave the issue of the ab initio validity of the charter to the London arbitrators. The appellate court disagrees.

In finding that, on November 2, 1995, Zhen Hua had broken off discussions over the desirability of an ad hoc side agreement, the trial judge did not clearly err in interpreting the written communications between the parties under general principles of the law of contract formation and consistently with the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3] or the “New York Convention.”

Later communications between the parties reinforce the Court’s conclusion that the trial court’s findings were not clearly erroneous. For example, Titan had, at one point, asked Zhen Hua to confirm that the charter consisted of an agreement to arbitrate in London. “Although Zhen Hua replied that ‘[o]wners ... reiterate that both sides have an agreement to arbitrate in London via simplified procedure according to Shell Time 4 Clause 41(C) Camaro Proforma to ascertain whether there is a charter between Guangzhou Zhen Hua and U.S. Titan,’ Titan never responded to this suggestion that the parties were arbitrating the issue of the charter party’s existence. Instead, Titan responded that arbitration was acceptable ‘per the agreement,’ which the district court reasonably construed to mean the charter party itself. (Cit.)”

“From November 1995 until February 1996, the parties dickered over arbitrators, never clarifying what exactly they were arbitrating or which agreement bound them to arbitrate. As a result, we hold that the district court did not commit clear error by finding that the negotiations never resulted in a ‘meeting of the minds’ sufficient to form a binding ‘ad hoc’ agreement to arbitrate whether they had entered into a charter party.” [Slip op. 11]

Zhen Hua also challenged the lower court’s finding that the charter party had entered into force. “Zhen Hua does not contest, however, that the district court's finding was in accordance with the standard set forth in Great Circle Lines, Ltd. v. Matheson & Co., 681 F.2d 121, 125 (2d Cir. 1982) which holds that a ‘recap’ communication, such as the one sent on September 26, 1995 in the instant case, represents ‘an agreement as to the charter party's main terms,’ with the ‘subject details’ being no more than an acknowledgment of an intention to continue negotiations.”

“Instead, Zhen Hua calls for the overruling of Great Circle Lines, asserting that its holding conflicts with the laws of the United Kingdom and with the trade practices of the shipping industry at large. Unpopular though it may be, Great Circle Lines is binding precedent, and we ‘will not overrule a prior decision of a panel of this Court absent a change in the law by higher authority or by way of an in [sic] banc proceeding of this Court." (Cit.).” [Slip op. 12]

Citation: U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 2001 WL 128004 (2nd Cir. Feb. 15).

CONSULAR RELATIONS

As matter of first impression, Fifth Circuit rules that Vienna Convention on Consular Relations does not grant arrested foreign nationals private, judicially enforceable rights to consult with consular officials

The Immigration and Naturalization Service (INS) suspected that Alejandro Jimenez-Nava, an illegal alien from Mexico, was making fraudulent immigration documents and social security cards. Suspicion ripened into belief when INS agents questioned Jimenez-Nava and he showed them the document laboratory where he worked. The agents read Jimenez-Nava his Miranda rights on several occasions, advised him of his right to confer with Mexican consular officers and charged him with document fraud.

During his suppression hearing, Jimenez-Nava admitted that he had received the Miranda advice and had a chance to contact consular officers. Having allegedly declined because he did not understand the function of consular officers, he appeals his conviction based on alleged violations of the Vienna Convention on Consular Relations (April 24, 1963, 21 U.S.T. 77, T.I.A.S. No. 6820). The U.S. Court of Appeals for the Fifth Circuit affirms, finding no error in the denial of Jimenez-Nava’s motion to suppress.

Jimenez-Nava argued that Article 36 of the Vienna Convention grants foreign nationals a private, judicially-enforceable right to consult with consular officials of their home country. In his view, the court should have suppressed his post-arrest statements and the evidence obtained from the document laboratory.

This is a matter of first impression in the Fifth Circuit. So far, courts have avoided the issue of whether the Vienna Convention provides individually enforceable rights of consultation with consular officials. Moreover, there is a presumption against implying private rights. The U.S. State Department has posited that the Vienna Convention does not establish rights for individuals but only state-to-state rights and obligations.

“First, by dwelling on the plain language concerning ‘rights’ in Article 36, Jimenez-Nava must discount the equally plain language in the Preamble that the treaty’s purpose ‘is not to benefit individuals’. Appellant would confine the limitation to consular officials, but that interpretative route hardly assists him, since consular officials are the specific beneficiaries of many of the treaty provisions. ... If the treaty cannot benefit them by creating individually enforceable rights, how can it intend to confer enforceable rights on all foreign nationals detained in the receiving state?”

“Second, while acknowledging the general rule against implication of personal rights in treaties, Jimenez-Nava notes that, like any agreement, treaties may explicitly confer individual rights. ... He cites as an example [the] Supreme Court’s construction of an extradition treaty ... Unlike the Vienna Convention, [however] the purpose and provisions of the extradition treaty related directly to the individual right asserted.” [Slip op. 13-14]

Finally, the Court rejects the argument that consular notification and communication is a “fundamental right” analogous to the Fifth and Sixth Amendments. All sister circuits have held that suppression of evidence is not a remedy for an Article 36 violation.

“Article 36 does not articulate a specific remedy. The treaty states that the rights of consultation ‘shall be exercised in conformity with the laws and regulations of the receiving State, subject to the proviso, however, that the said laws and regulations must enable full effect to be given to the purposes for which the rights accorded under this Article are intended.’ Vienna Convention, Art. 36(2). The treaty leaves the implementation to the discretion of each signatory state so long as its ‘purposes’ to ensure free communication and access are given full effect. ...”

”Finally, most countries do not have a suppression remedy. [Cit.] No other signatories to the Vienna Convention have suppressed statements under similar circumstances and two have rejected this remedy. [Cit.] If suppression becomes the remedy in the United States, the treaty would have an inconsistent meaning among signatory nations. Thus, refusing to resort to the exclusionary rule promotes ‘harmony in the interpretation of an international agreement.’” [Slip op. 20-22]

Citation: United States v. Jimenez-Nava, No. 99-11300 (5th Cir. February 26, 2001).

JUDICIAL ASSISTANCE

House of Lords upholds power of British courts civilly to enforce RICO confiscation orders issued by U.S. District Court before British law granted that power to its courts

Larry Barnette is an American citizen whose companies had profitable contracts between 1977 and 1982 to run laundries which the U.S. had built in Germany to wash the clothes of American servicemen. During this period, he cheated the U.S. of about $15,000,000 and also decided to launder money instead of clothes. Some of the fraudulent proceeds went to Barnett’s Panamanian company, Old Dominion SA (ODSA), which, in turn, sent the money to its accounts in Switzerland, Liechtenstein and other places.

Just before his 1983 indictment for fraud, Barnette transferred 800 of the 900 shares he held in ODSA to his then wife (Kathleen) and 100 to his children. In 1984, a federal court convicted Barnette on several counts of fraud and connected offenses including violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Pursuant to RICO, the court next ordered Barnette on October 1, 1984 to forfeit his interest in ODSA stock.

In November 1984, the court sentenced Barnette and ordered him to pay $7,000,000 in restitution to the United States to be set off against the ODSA forfeiture orders. This arrangement limited Barnette’s liability to the greater of the two sums. The court also ordered Barnette to disclose all relevant information about ODSA’s net worth.

Although Barnette paid $7,000,000 into the court, he refused to provide valuation data on ODSA, claiming that, on the date of the forfeiture order, he no longer owned it. The court, however, held that the government’s title related back to the latest date of Barnette’s criminal activity. Meanwhile, Kathleen Barnette left her husband in 1983. She acquired citizenship in the Caribbean and now resides in England. In December 1992, she failed to obey a U.S. court discovery order because she was outside the jurisdiction.

In January 1995, the U.S. succeeded in persuading a Liechtenstein bank to turn over an ODSA account amounting to about $3,758,000. The U.S. then asked the court to assess the value of the ODSA shares as of October 15, 1984 based on the available data. It also moved the court to hold both Mr. and Mrs. Barnette in contempt of court for conspiring to elude the original forfeiture order. On November 15, 1995, the court credited Barnette for the Liechtenstein funds and the interest. Applying U.S. Treasury interest rates from January 1985 to June 1995, however, the court increased the sum to be forfeited to about $11,768,000.

The U.S. then applied to the British courts for aid in collecting these sums. In August 1994, certain British statutes for the first time conferred power on the High Court to enforce “external confiscation orders” made in the United States. These provisions included the Criminal Justice Act 1988 (Designated Countries and Territories) Order (SI 1991/2873) ("the DCO") as amended by the Criminal Justice Act 1988 (Designated Countries and Territories) (Amendment) Order 1994 (SI 1994/1639).

In September 1997, the High Court issued orders under Section 77 of the Criminal Justice Act of 1988 (CJA) that (1) restrained Kathleen Montgomery (the former Mrs. Barnette) and her husband, Lee Edwin Montgomery, from disposing of various assets and (2) demanded the revelation of relevant financial information.

On the application of the Montgomerys, however, the High Court dismissed the orders on February 20, 1998. First, the Court ruled that a party could not use the powers of the Act to enforce American confiscation orders issued before the Parliament made the DCO applicable to the United States. Second, it held that the orders of the U.S. district court did not constitute “external confiscation orders” for DCO purposes.

The U.S. government appealed to the Court of Appeal. The Court reversed the High Court on both points and reinstated the restraint orders. The Montgomerys then appealed to the House of Lords which dismisses their appeal.

The House first addresses the issue of whether the orders in question are “civil” in nature. It agrees with the U.S. position on this point, holding that the nature of the proceedings in which the original order was entered does not necessarily determine whether the courts should regard the machinery of judicial enforcement as a “criminal” matter.

“Modern legislation, of which Part VI of the 1988 Act is a good example, confers powers upon criminal courts to make orders which may affect rights of property, create civil debts or disqualify people from pursuing occupations or holding office. Such orders may affect the property or obligations not only of the person against whom they are made but of third parties as well. Thus the consequences of an order in criminal proceedings may be a claim or dispute which is essentially civil in character. There is no reason why the nature of the order which gave rise to the claim or dispute should necessarily determine the nature of the proceedings in which the claim is enforced or the dispute determined.” [para. 19]

The Montgomerys also contended, inter alia, that the general presumption against retrospective legislation governs here, precluding the enforcement of an order entered at a time when the DCO had not yet become applicable to the United States. The Lords disagree.

“In the case of the imposition of a confiscation order by the criminal court, I can see that there are strong arguments for applying the presumption so as to limit the power to offences committed after the legislation came into force. (Cit.) Indeed, in Welch v United Kingdom (1995) EHHR 76 the European Court of Human Rights decided that the application of the power to make a confiscation order in respect of an offence committed before Part VI came into force offended against the prohibition on retrospective penalties in article 7 of the European Convention for the Protection of Human Rights and Fundamental Freedoms.” [para. 30]

But this is not such a case. “There is no suggestion that the Florida confiscation order was imposed in respect of an offence committed before the power conferred by RICO came into force. It was made under existing powers in respect of property which Larry Barnette had obtained by a fraud upon the United States. In my opinion the enforcement in this country of rights conferred upon the United States by an order made before the DCO came into force is a very different matter from the retrospective imposition of a penalty. Even if there was nothing which the United States government could have done before 1 August 1994 to recover its assets from Mr or Mrs Montgomery by proceedings in this country, I see no unfairness in it now being allowed to do so.” [Id.]

The Montgomerys also argued that the judicially-imposed interest was to punish them for non-compliance with prior orders and, to that extent, could not be counted as part of the confiscation order itself. The House rejects this contention.

“The defendants' acquisition of the assets which gave value to the ODSA shares was as a result of or in connection with criminal conduct of Larry Barnette and their continuing retention of those shares was likewise a result of the same conduct. Alternatively, if one looks at the pecuniary advantage which the defendants received, section 71(4) of the Act as applied by the DCO requires the defendants to be treated as if they had received ‘a sum of money equal to the value of the pecuniary advantage,’ i.e. the ODSA shares. The retention of such a sum for ten years is in itself a pecuniary advantage even if the whole of the original capital is repaid. In my opinion, therefore, an order which deprives the defendants of that further advantage is within the definition of an external confiscation order.” [para. 32]

Citation: United States of America v. Montgomery, No. [2001] UKHL/3, [2001] 1 W.L.R. 196, (2001) 151 N.L.J. 136 (House of Lords).

JURISDICTION

Second Circuit rules (1) that district court had subject-matter jurisdiction over state-owned Chinese corporation under “arbitration exception” to FSIA and (2) that court had specific personal jurisdiction over defendant

[For the preliminary facts, see ARBITRATION above.] Zhen Hua had moved to dismiss Titan’s petition for lack of subject matter jurisdiction, pointing out that state-owned Zhen Hua indisputably qualified as a “foreign state” under the FSIA. The district court agreed that Zhen Hua was presumptively entitled to immunity from suit but, inter alia, concluded that the company fell within the “arbitration exception” found in 28 U.S.C. Section 1605(a)(6)(B).

Zhen Hua had also challenged the district court’s personal jurisdiction over it. Remarking that subject matter and personal jurisdiction over foreign states are almost coextensive, the district court held that Zhen Hua’s contractual negotiations in the U.S. through Seagos, its broker, were enough to meet the demands of due process. Although Zhen Hua appealed both jurisdictional rulings, the U.S. Court of Appeals for the Second Circuit affirms.

In pertinent part, the “arbitration” exception provides that: “A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case‑‑ (6) in which the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration under the laws of the United States, or to confirm an award made pursuant to such an agreement to arbitrate, if ... (B) the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards ...”

The Circuit Court agrees with the district court that this exception applies for two reasons. First, both the U.S. and China are parties to the Convention, and second, the parties had formed a charter party agreement that contained an arbitration clause.

Zhen Hua’s only argument in reply went back to its theory that the ad hoc side agreement meant that the binding nature of the “alleged” charter party remains unsettled until the arbitrators decide the question in London. Having found that the lower court’s rejection of such a side agreement was not clearly erroneous, the appellate court has no difficulty in spurning Zhen Hua’s argument in the FSIA context.

In pitching its argument against personal jurisdiction by demanding a showing of substantial, continuous and systematic contacts with the U.S. as a whole, the Court notes that Zhen Hua ignored the fact that “specific” jurisdiction has a lower threshold than “general” jurisdiction. “Where, as here, the claim arises out of, or relates to, the defendant's contacts with the forum, i.e., the negotiation of the charter party with an American corporation located in New York and the use of brokers in Connecticut, the defendant need only prove ‘limited’ or ‘specific’ jurisdiction. In such a case, the required minimum contacts exist where the defendant ‘purposefully availed’ itself of the privilege of doing business in the forum and could foresee being ‘haled into court’ there.” [Slip op. 15]

Finally, the Court sees in the record enough facts to show that the lower court’s exercise of specific personal jurisdiction was reasonable. “To facilitate the negotiations Zhen Hua utilized a broker located in Connecticut, which communicated with Titan personnel in New York via telex and/or facsimile to Titan's broker in Connecticut. Having engaged in this commercial conduct, Zhen Hua should have foreseen the possibility of being ‘haled into [an American] court’ if a dispute were to arise out of the negotiations. Furthermore, Zhen Hua proffers no reason to believe that litigating in New York for the sole purpose of referring this matter to arbitration in London will impose or has imposed any undue hardship.” [Id.]

Citation: U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 2001 WL 128004 (2nd Cir. Feb. 15).

LICENSING AGREEMENTS

Ontario Court of Appeal dismisses appeal by Welch Foods, Inc. in its action against Cadbury Beverages Canada Ltd. over alleged breaches of their exclusive licensing agreement allowing Cadbury to make and distribute Welch’s grape juices, jams and drinks in Canada

After buying a plant in St. Catherines in 1954, Powell Foods Company agreed to make drink and other food products for the Welch Grape Juice Company, a large international company. In 1969, Schweppes obtained a majority interest in the Powell company and merged with Cadbury to form Cadbury Schweppes Powell Limited. Under their 1972 exclusive licensing agreement (Agreement), Cadbury would make grape juice, grape jams and jellies, frozen concentrated grape juice and grape drinks. By the middle of the 1990s, the St. Catherines plant was profitably making and circulating quality Welch products and was providing several hundred jobs.

During 1996, however, both companies took part in activities that affronted the other. Welch Foods Inc. ended up suing Cadbury Beverages Canada, Inc. in the Ontario courts. After a forty-one day trial, the court of first instance ruled in favor of Cadbury on most issues. Welch then took an appeal.

The Ontario Court of Appeals dismisses. The most important issue in the appeal relates to a food business arrangement called “co-packing” which is essentially a form of subcontracting. The Agreement had given Cadbury the exclusive right to make and market Welch products in return for royalties. In 1996, Cadbury wanted to set up a permanent co-packing arrangement with Imperial Flavours Inc. to make and store Welch’s frozen concentrated juice products. Welch, however, refused to consent. The trial judge found that, under the Agreement, Welch’s action was unreasonable.

A second prong of the appeal questioned the trial judge’s reading of restrictive covenants in the Agreement. The question is whether Cadbury had violated these covenants by buying the trade mark “C’Plus” in 1988 which allowed it to market juice under that name in competition with Welch. The trademark was already licensed to the predecessor of Coca Cola Foods Canada, Inc.

Finally, the appeal challenged the remedies developed by the trial judge. Principally, Welch complained of the damages he had awarded to Cadbury as well as the restrictions on Welch’s future evaluations of whether or not to consent to any co-packing set up suggested by Cadbury.

Article 6.02 of the Agreement provides in part that: “... Both parties agree that no such approval or consent will be unreasonably withheld, consistent with the tenor and purpose of this Agreement.” On the co-packing issue, the Court agrees with the trial judge.

“In summary, in my view the Cadbury‑Imperial co‑packing agreement was a small and non‑controversial matter for Welch until April 18, 1996. After that date, it became a major weapon for Welch as it moved quickly and aggressively to, in the trial judge's words, ‘appropriate the benefits of the licence which Cadbury and its predecessors had enjoyed since 1954.’”

“This course of conduct led Welch to withhold its consent to a continuation of the co‑packing arrangement. This decision was made for a collateral and impermissible purpose. It was, therefore, not a reasonable withholding of consent within the meaning of article 6.02. On the contrary, the withholding of consent was not, in the words of that article ‘consistent with the tenor and purpose of the Agreement’” [Slip op. 31-32]

On the damages issue, the Court also agrees with the lower court. For Welch’s unreasonable failure to consent to co-packing, the trial judge had accepted expert testimony from Stephen Cole that, between August 1996 to December 1998, it cost Cadbury $465,000 more to produce at St. Catherines compared to the co-packing deal with Imperial plus another $192,000 for the period to December 1999.

“The reason Cadbury kept the St. Catharines plant open was Welch's refusal to consent to co‑packing at Imperial. Accordingly, it was entirely appropriate for Mr. Cole to compare the costs to Cadbury of keeping the plant open with the costs of co‑packing at Imperial. In his report he documented a difference of $ 465,000. The trial judge [properly] accepted his analysis and conclusion.” [Slip op. 32]

Citation: Welch Foods, Inc. v. Cadbury Beverages Canada, Inc., 2001 Ont. C. A. Lexis 25 (Ct. App. Ont. 2001).

POLITICAL QUESTION DOCTRINE

Eleventh Circuit upholds dismissal of constitutional challenge to NAFTA as political question, and, as matter of first impression, ponders question of whether NAFTA constituted “treaty” under Article II of Constitution

The Made in USA Foundation, along with several labor organizations, sued the United States, arguing that the North American Free Trade Agreement (NAFTA) is unconstitutional.

After the U.S., Mexico and Canada had concluded NAFTA on December 17, 1992, the U.S. Congress passed the NAFTA Implementation Act, approving NAFTA and providing for several implementing laws (Pub. Law No. 103-182, 107 Stat. 2057 (1993), codified at 19 U.S.C. Sections 3301-3473). Thus, neither NAFTA nor the Implementation Act went through the ratification procedures of the Treaty Clause of the Constitution whereby two-thirds of the Senate would give its consent.

An Alabama federal court granted the U.S.’ summary judgment motion, and the plaintiffs appealed. This case presented an issue of first impression in the Eleventh Circuit, i.e., whether certain kinds of international commercial agreements are “treaties” (see Article II, Section 2 of the U.S. Constitution), and if so, whether the Treaty Clause provides the sole means of enacting such agreements into law. The U.S. Court of Appeals for the Eleventh Circuit dismisses the appeal, and remands with instructions to dismiss the action and vacate the decision of the district court.

The U.S. Supreme Court has never decided which international agreements require Senate ratification under Article II, Section 2 and which do not. First, the Circuit Court finds that the plaintiffs do in fact have standing because they are alleging injuries that open trade under NAFTA has caused them. Moreover, they claim that, if the courts were to invalidate NAFTA, U.S. consumers would buy more U.S. products rather than imports.

Second, the Court essentially agrees with the Government’s argument that the Constitution fails to define the term “treaty” or proper procedures for approving international commercial agreements. Rather, it gives the choice of what procedure to use for a given agreement to the Legislative and Executive Branches, a principle crystallized in the “political question” doctrine.

To determine this issue, the Court uses the three-pronged inquiry proposed by Justice Powell’s concurrence to Goldwater v. Carter, 444 U.S. 996, 998 (1979): (1) whether the issue involves resolution of questions committed by the text of the Constitution to a coordinate branch of government; (2) whether resolution of the question demands that a court move beyond areas of judicial expertise; and (3) whether prudential considerations counsel against judicial intervention.

The first issue counsels against reaching the merits of this case. “We ... have little doubt that courts have the authority — indeed, the duty — to invalidate international agreements which violate the express terms of the Constitution. Nonetheless, with respect to commercial agreements, we find that the Constitution’s clear assignment of authority to the political branches of the Government over our nation’s foreign affairs and commerce counsels against an intrusive role for this court in overseeing the actions of the President and Congress in this matter.” [Slip op. 38]

As for the second issue, the Court readily agrees with the Government that this case is beyond judicial expertise. “We ... find the disposition in Goldwater instructive, if not controlling, in that the Supreme Court declined to act because the constitutional provision at issue does not provide for an identifiable textual limit on the authority granted by the Constitution. [Cit.] Indeed, just as the Treaty Clause fails to outline the Senate’s role in the abrogation of treaties, we find that the Treaty Clause also fails to outline the circumstances, if any, under which its procedures must be adhered to when approving international commercial agreements.” [Slip op. 42] Here, the plaintiffs themselves failed to offer a workable definition of “treaty,” contenting themselves with arguing that “major and significant” agreements require Senate approval under Article II, Section 2.

As for the third issue, the Court notes that prudential factors such as the necessity of federal uniformity, and the potentially adverse effect on foreign relations, counsel against reaching the merits of the case.

“A judicial declaration invalidating NAFTA at this stage would clearly risk ‘the potentiality of embarrassment from multifarious pronouncements by various departments on one question.’ [Cits.] ...[W]e believe in this case that a challenge to the procedures used to enact NAFTA is inextricably bound to its substantive provisions, inasmuch as a judicial declaration invalidating NAFTA would be aimed at forcing the withdrawal of U.S. participation in the agreement, with serious repercussions for our nations external relations with Mexico and Canada.”

“A judicial order contradicting the action of the President and Congress could also have a profoundly negative effect on this nation’s economy and its ability to deal with other foreign powers. Significantly, granting the appellant’s requested relief in this case would not only affect the validity of NAFTA, but would potentially undermine every other major international commercial agreement made over the past half-century.” [Slip op. 50]

Citation: Made in USA Foundation v. United States, No. 99-13138 (11th Cir. February 27, 2001.

SOVEREIGN IMMUNITY

As matter of first impression, Ninth Circuit holds that, under FSIA, sovereign’s submission to suit in own courts does not waive its objections to jurisdiction in United States

The Banco Central de Reserva del Peru (BCRP) (Federal Reserve Bank of Peru), Peru’s monetary authority, financed Peruvian companies, especially those in non-traditional industries. In 1988, BCRP instituted a policy to protect exporters from losses that could result from devaluations of the Peruvian currency. The policy lasted less than a year.

One of the affected companies, Novotec S.A., which assembles and exports computers made from U.S. parts, suffered losses because the Peruvian currency declined after it had bought U.S. parts. One month before the policy ended, the company applied for $400,000 to compensate for losses due to currency fluctuations.

Novotec successfully sued BCRP in Peru, and, in 1997, the Peruvian Supreme Court initially confirmed the award. Novotec then assigned its interest in it to Renato Corzo and DC Ltd. (Jointly “Corzo”). Corzo, however, did not enjoy the judgment for long. In January 1988, the Peruvian Supreme Court declared the previous judgment “null and void.” The Court alleged that it had denied BCRP due process because it issued the decision “by mistake, without the justices having been aware that the document they were signing included a decision with the opposite outcome they wished for that judgment.” Although this turnabout apparently caused quite a scandal in Peru, it prevented Corzo from recovering. He then filed an action to enforce the original judgment in the U.S. and sought to attach BCRP’s U.S. assets.

BCRP claimed that it was immune from suit. The California federal court dismissed the action for lack of jurisdiction under the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Sections 1602-1611]. Corzo appealed, arguing that U.S. courts have jurisdiction (1) because of waiver, (2) because of BCRP’s “commercial” activity, and (3) for reasons of comity. The U.S. Court of Appeals for the Ninth Circuit affirms.

To support the argument that BCRP had expressly waived its immunity (see 28 U.S.C. Section 1605(a)(1)), Corzo had presented several expert opinions. The experts had concluded that, under the Peruvian Constitution and BCRP’s own rules, BCRP was not immune from suit. Furthermore, Corzo claimed that BCRP’s submission to litigation in Peru constituted an implied waiver of sovereign immunity.

The Court rejects these explicit and implicit waiver arguments. “The precise issue presented by this case — whether a sovereign’s amenability to suit in the courts of its own country automatically subjects it to jurisdiction in the United States — is one of first impression in this circuit. However, we have repeatedly stated that the waiver exception to sovereign immunity must be narrowly construed. [Cits.] We have also stated that a foreign sovereign cannot be sued in the United States unless it could have contemplated that its actions would subject it to suit here. ... It is difficult to see how the BCRP could have contemplated that a run-of-the-mill lawsuit in Peru could result in having to litigate in the United States.” [Slip op. 8-9] Other courts have come to the same conclusion. It is therefore irrelevant under the FSIA that BCRP may have waived its sovereign immunity in Peru.

Citing the exception in 28 U.S.C. Section 1605(a)(2), Corzo claimed that BCRP has been carrying out “commercial activities” in the U.S. Moreover, BCRP’s actions had a foreseeable effect in the U.S. because the company became unable to pay its creditors in the U.S. The Court disagrees with these arguments. The activity giving rise to the lawsuit was not “commercial activity” because granting exchange rate compensation was clearly a “sovereign” or governmental act. The financial losses to U.S. companies were at best an incidental result of BCRP’s actions.

Finally, the Court rejects the argument that international comity requires enforcement of the original Peruvian judgment. Here, the Peruvian Supreme Court itself had declared its prior judgment “null and void.” Regardless of why the Peruvian Supreme Court reversed itself, international comity does not mandate that the U.S. courts should enforce the original judgment.

Citation: Corzo v. Banco Central de Reserva del Peru, No. 00-55084 (9th Cir. March 12, 2001).

WORLD TRADE ORGANIZATION

WTO dispute settlement panel issues report in U.S.-Japan dispute over anti-dumping measures on certain steel products from Japan that finds several U.S. violations of Anti-Dumping Agreement

On September 30, 1998, several U.S. steel manufacturers and two workers’ unions asked the government to impose anti-dumping duties on imports of certain hot-rolled steel products from Brazil, Japan and Russia. The later investigation by the U.S. Department of Commerce (USDOC) focused on three Japanese producers, Kawasaki Steel Corporation, Nippon Steel Corporation, and NKK Corporation, which account for 90% of all known exports of the products at issue. On June 29, 1999, USDOC published an order that imposed estimated dumping duties on the above products ranging from 17.86% to 67.14%.

Japan challenged the U.S. anti-dumping measures based on the WTO Anti Dumping Agreement (AD Agreement) and the trading rules of GATT 1994. On March 20, 2000, the WTO Dispute Settlement Body set up a Panel pursuant to Japan’s request. It issued its Report on February 28, 2001.

The Panel, in particular, came to the following seven conclusions. First, the U.S. had acted inconsistently with Articles 6.8 and Annex II of the AD Agreement in its application of “facts available” to two of the Japanese producers. Second, Section 735(c)(5)(A) of the American Tariff Act of 1930, as amended, which requires USDOC to exclude only margins based entirely on facts available in determining an “all others” rate, is inconsistent with Article 9.4 of the AD Agreement. Therefore, the U.S. had failed to carry out its duty under Article 18.4 of the AD Agreement and Article XVI of the Marrakesh Agreement by failing to bring that provision into compliance with the AD Agreement.

Third, the U.S. had not observed Article 2.1 of the AD Agreement in excluding certain home-market sales to affiliated parties from the calculation of normal value on the basis of the “arm’s length” test. The replacement of those sales with sales to unaffiliated downstream purchasers conflicted with Article 2.1 of the AD Agreement. Fourth, Sections 733(e) and 735(a)(3) of the Tariff Act of 1930 dealing with determining “critical circumstances” do not clash with Articles 10.1, 10.6, and 10.7 of the AD Agreement.

Fifth, Section 771(c)(iv) of the Tariff Act of 1930 (“captive production”) comports with Articles 3.1, 3.2, 3.4, 3.5, 3.6 and 4.1 of the AD Agreement. Sixth, the U.S. did not contravene Articles 3.1, 3.4 and 3.5 of the AD Agreement in its examination and determination of a causal connection between dumped imports and injury to the domestic industry. Finally, the Panel found that the U.S. did not violate Article X:3 of GATT 1994 in conducting its investigation and in making its determinations.

Citation: United States - Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (WT/DS184/R) (28 February 2001). [Report is available on WTO website “www.wto.org”].

WORLD TRADE ORGANIZATION

WTO arbitrator issues report on U.S. implementation of recommendations regarding 1916 Anti-Dumping Act, finding that 10 months is reasonable period of time for U.S. to pass new legislation to comply with WTO recommendations

On September 26, 2000, the WTO Dispute Settlement Body adopted the Panel Reports In the Matter of United States - Anti-Dumping Act of 1916. The EU and Japan had brought the complaints alleging U.S. violations of trading rules. The WTO agreed that the U.S. Antidumping Act violates GATT 1994 and the Anti-Dumping Agreement. See 2000 International Law Update 146. The WTO decisions required the U.S. to remedy the specified violations of trading rules within a reasonable period of time.

The EU and Japan notified the Dispute Settlement Body on November 17, 2000, that they had been unable to agree with the U.S. on the length of the remedial time period. Two days later, the parties did get together to pick an arbitrator who would determine the “reasonable period of time.”

The U.S. argued that a “reasonable period of time” should be 15 months in this case because of the lengthy legislative process required and because of recent changes in the Executive Branch and in Congress. The EU argued that the time period should not last longer than 6 months and 10 days, and that the burden is on the U.S. to show that compliance is not possible within that time period. Japan also claimed that 6 months should be enough.

The Arbitrator reviews the U.S. legislative and administrative process, and finds that the U.S. Congress, in some instances, acts quickly and, in others, is quite slow. The 6 months, 10 day’s time period given in the previous dispute over U.S. Foreign Sales Corporations is not decisive. In this case, the U.S. Congress began its current session on January 3, 2001. It should have time to consider and pass the required legislation according to its customary procedures. A reasonable time, however, does not necessarily extend to the end of the current congressional session.

The Arbitrator determines that 10 months from the adoption of the Panel and Appellate Body Reports (that is, from September 26, 2000 on) is a “reasonable period of time” for U.S. compliance. It will expire on July 26, 2001.

Citation: United States - Anti-Dumping Act of 1916 (WT/DS136/11, WT/DS162/14) (28 February 2001). [Report is available on WTO website “www.wto.org”.]

WORLD TRADE ORGANIZATION

WTO arbitrator issues report specifying that ten months is “reasonable time” for Canada to amend legislation extending period of patent protection from 17 to WTO standard of 20 years

On October 12, 2000, the WTO Dispute Settlement Body adopted the Panel and Appellate Body reports in the case of Canada’s term of Patent Protection. Under WTO rules, member states should grant 20 years of patent protection. Until 1989, Canada only granted 17 years. Moreover, it did not plan to retroactively grant the extended 20-year protection to previously patented products. See 2000 International Law Update 160. The U.S. and Canada, however, could not agree on a reasonable period of time for Canada to implement the necessary legal changes to comply with the WTO suggestions.

Canada claimed that it would need 14 months and 2 days to effectuate these recommendations; this period would expire on December 14, 2001, the last day of the session of the Canadian Parliament before the Christmas recess of 2001. Canada also emphasized that the WTO recommendations require amendments to the Canadian Patent Act, not just administrative changes. Canada also noted that, in the dispute over the U.S. Copyright Act, the U.S. had received — without further explanation from the arbitrator — a period of 12 months to carry out the necessary legal changes.

The U.S. argued that 6 months would be enough. The Arbitrator notes, however, that a period of 6 months would end right in the middle of the Spring session of the Canadian House of Commons.

In light of the practicalities of Canada’s legislative process, the Arbitrator finds that a “reasonable period of time” in this case depends on the priority that Canada gives to the matter. Therefore, the Arbitrator grants Canada 10 months from the date of adoption of the Panel and Appellate Reports, that is, until August 12, 2001.

Citation: Canada - Term of Patent Protection (WT/DS170/10) (28 February 2001). [Report is available on WTO website “www.wto.org”.]

EU renews commercial and other projects with North America, Far East and Australasia. The EU has decided to continue its program for cooperation and commercial relations with the industrialized countries of North America, the Far East, and Australasia. The Regulation specifically names the U.S., Canada, Japan, Korea, Australia and New Zealand. The EU will apply funds to strengthen educational and cultural programs, to enhance customs cooperation, and to assist joint research projects. Citation: Council Regulation No 382/2001, 2001 O.J. of European Communities (L 57) 10, 27 February 2001.

Mexico agrees to deliver Rio Grande water to U.S. Pursuant to instructions from Presidents Bush and Fox, specialized representatives of U.S. and Mexico entered into a framework arrangement in Washington on March 16 to have Mexico deliver 600,000 acre-feet of water to the U.S. This action will partially fulfill Mexico’s outstanding obligations under the 1944 Treaty between the Government of the United States of America and the Government of the United Mexican States Relating to Utilization of Waters of the Colorado and Tijuana Rivers and of the Rio Grande [59 Stat. 1219, T.S. 994, 3 U.N.T.S. 313]. This new bilateral framework resolves the allocation of Rio Grande waters to the U.S. for this season and provides a cooperative basis for settling the issue of Mexican water deliveries in the medium and long term. Citation: Statement of Richard Boucher, U.S. State Department Spokesman, released March 20, 2001.[ See “http://www.state.gov”].

U.S. restricts imports of Italian archeological material. To protect Italy’s cultural heritage, the U.S. Customs Service has issued a final rule restricting imports of Italian archeological material from the pre-classical, classical and imperial Roman periods (19 C.F.R. Part 12). The covered materials would date approximately from the 9th century B.C. through the 4th century A.D. The rule is based on an agreement of January 19, 2001, between the U.S. and Italy pursuant to the Convention on Cultural Property Implementation Act (Pub. Law No. 97-446) in accordance with the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property [823 U.N.T.S. 231 (1972)]. The rule also contains a Designated List of Archeological Material. Citation: 66 Federal Register 7399 (January 23, 2001). [Further information on archeological import restrictions is available on“exchanges.state.gov/education/culprop”.]

EU increases commercial pressure on Afghanistan’s Taliban. Citing Afghanistan’s failure to expel terrorists who have found refuge on its territory, e.g., Usama Bin Ladin, the EU Council has issued Regulation No 467/2001. For example, the Regulation forbids the export of the chemical acetic anhydride which can be used for military purposes, and freezes all funds and resources of Taliban organizations and individuals in the EU. It also closes the EU offices of the Afghanistan airline “Ariana Afghan Airlines”, and bans all flights between the EU and Afghanistan. - In a related matter, the Council had previously issued Common Position 2001/154/CFSP imposing identical sanctions. Citation: 2001 O.J. of the European Communities (L 67) 1, 9 March 2001 (regulation) & (L 57) 1, 27 February 2001 (common position).

EU renews educational cooperation with U.S. and Canada. With Decision 2001/196/EC, the Council of the European Union approved an Agreement between the European Community and the United States of America renewing a programme of cooperation in higher education and vocational education and training. The Agreement renews cooperation between the parties which a 1995 Agreement had set up. It will promote student exchange and partnerships among educational institutions. It also establishes a Joint Committee to review program activities and to make annual reports. The Annex to the Agreement lists some specific actions to be taken. Action 1, for example, involves Joint European Community/United States consortia projects for cooperation among educational institutions, such as exchange programs, teaching assignments, and short training courses. In Action 2, there will be a Fulbright/European Union program to provide scholarships for study, research and lecturing on EU affairs and EU-U.S. relations. Council Decision 2001/197/EC approved a virtually identical Agreement to continue a similar program with Canada. Citation: Council Decisions 2001/196/EC & 2001/197/EC, 2001 O.J. of European Communities (L 71) 7-22, 13 March 2001.

EU and U.S. lift most sanctions on Yugoslavia. The EU Council has amended Common Position 2000/696/CFSP which canceled sanctions on Yugoslavia but maintained restrictions on former President Slobodan Milosevic. The Council has now issued Common Position 2001/155/CFSP making it possible to grant visas to Milosevic and associates if they are brought into the EU to answer charges before the International Criminal Tribunal for the Former Yugoslavia (ICTY). — In a related matter, the U.S. Department of Commerce, Bureau of Export Administration, has published a final rule amending the additional license requirements for exports to Serbia according to the Export Administration Regulations (EAR). The restrictions, however, still apply to Milosevic and other listed individuals. Citation: 2001 O.J. of the European Communities (L 57) 3, 27 February 2001; 66 Federal Register 12845 (March 1, 2001).

EU publishes Treaty of Nice. The EU has published the text of the Treaty of Nice which was signed on February 26, 2001. It will amend the Treaty on European Union, as well as the Treaties establishing the European Communities and certain other EU acts. Upon ratification by each of the 15 Member States, it will enter into force. Citation: 2001 O.J. of European Communities (C 80) 1, 10 March 2001.