Sovereign Immunity

• Author: International Law Group

In 1979, the U.S. outfit, International Insurance Company (IIC), bought re-insurance from the Argentine company, Caja Nacional de Ahorro y Seguro (Caja). Caja claims to be an instrumentality of the Argentine Government.

When Caja failed to pay IIC more than $2 million in indemnity obligations, IIC initiated arbitration proceedings pursuant to the arbitration clauses of their agreements. The agreements provided for arbitration to be held in Chicago, Illinois, and that "judgment may be entered upon the award of the Arbitrators in any court having jurisdiction." Caja failed to take part in these proceedings. The arbitral tribunal, therefore, entered a default judgment against Caja for about $4.7 million.

IIC then petitioned an Illinois federal court to confirm the award. Caja filed an answer and affirmative defenses. IIC also moved for an order requiring Caja to post pre-judgment security. The Illinois Insurance Code prescribed that foreign companies have to post security to cover a final judgment before filing any pleadings. The district court reviewed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) [9 U.S.C. Section 201; 21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3], which permits courts to require "suitable security." It rejected Caja's claim that it is immune under the FSIA and thus not required to post such security. After Caja failed to post security or file a new answer, the district court entered a default judgment. Caja appealed. The U.S. Court of Appeals for the Seventh Circuit, however, affirms.

The Court first addresses the issue of its subject matter jurisdiction over this dispute. The Federal Arbitration Act (FAA) governs the enforcement, validity, and interpretation of arbitration clauses in commercial contracts in both state and federal courts (see 9 U.S.C. Section 9), and provides for actions to enforce arbitration awards. The FAA, however, does not provide an independent basis for federal question jurisdiction.

On the other hand, both the U.S. and Argentina are parties to the Inter-American Convention on International Commercial Arbitration ("Panama Convention") [9 U.S.C. Section 301]. Title 28, Section 1331 grants U.S. district courts original jurisdiction for proceedings "arising under the Constitution, laws, or treaties of the United States." In this case, IIC's action against Caja arises under the Convention because it involves a commercial arbitration agreement between...