Sovereign Immunity

• Author: International Law Group

In 1995, I.T. Consultants, Inc. (ITC) and the Republic of Pakistan (Pakistan) entered into a contract for ITC to manufacture and install geo-synthetic linings for irrigation canals and watercourses in Pakistan. Pakistan terminated the contract in 1997 due to financial constraints. The parties agreed in 1998 that ITC would receive about 11% of the original contract price.

When ITC failed to receive any payment, it brought an action in March 2000 against Pakistan and its Ministry of Food, Agriculture, and Labor (MINFAL) in the federal district court in Washington, D.C. The parties soon agreed on a Memorandum of Understanding (MOU) to settle the dispute. According to the MOU, ITC was to receive $1,143,965 and 10,535,000 Rupees. ITC later sent a letter to Dr. Zafar Altaf, the Secretary of MINFAL, asking him to transfer the Dollar-denominated funds to a bank account in Virginia, and the Rupee-denominated amount to an account in Rawalpindi, Pakistan. Dr. Altaf allegedly sent that letter back to ITC bearing his signature and the word "Okay."

A few weeks later, the newly appointed Secretary of MINFAL stopped the payment to ITC. Moreover, the federal court dismissed ITC's action for improper service in Pakistan. ITC refiled its case, this time naming Pakistan and the new MINFAL Secretary (in his personal capacity) as defendants, and also claiming that Pakistan had breached the MOU.

After the district court denied the defendants' motion to dismiss for lack of subject matter and personal jurisdiction, this interlocutory appeal followed. The U.S. Court of Appeals for the District of Columbia Circuit affirms in part and reverses in part.

The Court notes at the outset that under the Foreign Sovereign Immunities Act [28 U.S.C. Section 1602 ff] (FSIA), foreign states retain their traditional immunity from federal court jurisdiction in many instances. The FSIA, however, includes an exception for actions based on the foreign state's commercial activity if that activity "causes a direct effect in the United States." 28 U.S.C. Sections 1604, 1605(a)(2).

ITC alleged that, under the MOU, MINFAL was supposed to wire the larger portion of the payment into a Virginia bank account. Pakistan responded that, even if this were true, its failure to make the payment does not constitute a "direct effect" that would support FSIA jurisdiction.

The U.S. Supreme Court's leading case on the FSIA's "direct effect" doctrine is Republic of Argentina v. Weltover, 504 U.S. 607...