Sovereign Immunity

In 2008 Cruise Connections (CC), a U.S. corporation based in Winston-Salem, N.C., signed a contract with the Royal Canadian Mounted Police (RCMP) under which CC would dock in Vancouver three cruise ships that RCMP would use to house security staff during the 2010 Olympic Winter Games. The contract required CC to subcontract with two U.S.-based cruise lines, Holland America and Royal Caribbean, to provide the necessary ships. For this service, RCMP contracted to pay CC just over $54 million (Canadian).

CC then entered into “Charter Party Agreements” with Holland America and Royal Caribbean to provide three ships for approximately $39 million (U.S.). Because the ships would remain in Vancouver for several weeks, the two companies demanded assurances that they would incur no liability for Canadian corporate income and payroll taxes. Although it originally gave such assurances, RCMP later disavowed responsibility with regard to the taxes just as the two subcontractors were about to sign the Charter Party Agreements with CC.

The cruise lines balked, leaving CC unable to deliver signed Charter Party Agreements by the required date. When RCMP terminated the contract with CC, the corporation sued RCMP in U.S. District Court for the District of Columbia alleging breach of contract and unfair trade practices.

Under the Foreign Sovereign Immunities Act (FSIA), RCMP, as an “agency or instrumentality” of Canada, generally would enjoy sovereign immunity from suit, unless that immunity is abrogated by the Act’s Commercial Activities exception, which applies “in any case...in which the action is based... upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States” (italics added).

Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §§ 1602-11,Id. § 1605(a)(2). CC argued that this exception applied. RCMP, in turn, argued that the alleged breach had “no direct effect in the United States” and moved to dismiss for lack of jurisdiction.

CC responded with two arguments contending RCMP’s actions caused two direct effects in the U.S. First, the contract required RCMP to pay via wire transfer to a U.S. bank and RCMP’s failure to pay qualified as a direct effect in the U.S. Second, RCMP’s cancellation caused a direct effect in the U.S. because it resulted in the loss of U.S. business to CC and the cruise lines.

The district court rejected both...