An Excerpt From:
K&L Gates Global Government Solutions ® 2012: Annual Outlook
January 2012
International Trade
Government Litigation 2012:
Sovereign Immunity Implications Involving Foreign Banks
Recent federal court decisions highlight the importance of anticipating sovereign
immunity issues at the onset of any proceeding in the United States involving the
instrumentality of a foreign state, as well as being aware of possible sovereign
immunity repercussions related to ongoing efforts to stabilize banking institutions by
foreign governments.
Nationalized Foreign Banks and
Sovereign Immunity
The situation has been crystallized for
the courts under the following scenario:
investment funds bring a suit against a
foreign bank that has been nationalized
by its government during an effort to
stabilize the banking industry, alleging
that the bank breached various provisions
of an agreement after it had been
nationalized. Such suits typically include
a claim that the bank was not entitled
to sovereign immunity under the Foreign
Sovereign Immunities Act of 1976 (FSIA).
FSIA is the sole basis for obtaining
jurisdiction over a foreign state in U.S.
38
courts. FSIA immunizes foreign states from
the jurisdiction of U.S. courts, subject to
certain exceptions, and that immunity
extends to the “agency or instrumentality”
of such states. Exceptions to FSIA
immunity include when the legal action is
based on commercial activity carried on
in the United States by the foreign state
or actions outside the United States which
cause a “direct effect” in the United
States. The immunity may also be waived
either explicitly or “by implication.”
In addressing the issue of whether the
nationalized bank enjoys sovereign
immunity as an agency or instrumentality
of a foreign government, U.S. courts
K&L Gates Global Government Solutions ® 2012 Annual Outlook
commonly find commercial banks wholly
owned by a foreign state to be such
an agency or instrumentality [see, e.g.,
Commercial Bank of Kuwait v. Rafidain
Bank]. Although there may be arguments
that the bank has waived sovereign
immunity by agreeing to choice of forum
or law provisions in the relevant contracts,
that assertion can be challenged on the
grounds that the bank entered into the
agreement while still a private entity,
and the subsequent nationalization does
not mean the foreign government itself
had also agreed to such jurisdiction.
Claims that the FSIA commercial activities
exception has been met may similarly
be rejected on the grounds that prior to
nationalization the activities of the bank
were those of a private entity and not
acts of a foreign state or instrumentality,
and that post-nationalization the fact
that debt instruments were payable
in the United States is not sufficient
International Trade
commercial activity in the United States
to trigger the exception to immunity
under the FSIA. Alternately, arguments
that the bank’s actions outside the United
States nonetheless had a “direct effect”
in the United States must also show that
the effects followed as an immediate
consequence of those actions, and in
some instances courts have found that the
failure to remit funds payable in the United
States meets the “direct effect” requirement
[see, e.g., Republic of Argentina v.
Weltover, Inc.]. It does not necessarily
follow, however, that an increased risk of
nonpayment, rather than an actual failure
to pay funds, is sufficient to support a
“direct effect” finding.
foreign government. Continued financial
upheaval in Europe and elsewhere may
also lead to similar situations where the
nationalization of banks injects sovereign
immunity issues into commercial disputes.
This will likely impact the analysis of risks
and strategies involved in commercial
transactions with at-risk financial
institutions abroad, as well as impact
any subsequent litigation strategies, risk
analysis, and legal pleadings.
David T. Case (Washington D.C.)
david.case@klgates.com
Brendon P. Fowler (Washington D.C.)
brendon.fowler@klgates.com
These arguments and issues highlight
key risks involved when engaging
in financial transactions with foreign
banking institutions that may become
or already are instrumentalities of a
K&L Gates Global Government Solutions ® 2012 Annual Outlook
39
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