Tulane University Journal Publishing

Rhodes, Robert

Morini, Giuliano

English

Construction an International Commercial Transaction: A Primer

Fornaro, Susan

1993] RECENT DEVEWPMENTS 287 
Republic of Argentina v. Weltover, Inc.: THE FOREIGN SOVEREIGN 
IMMUNITIES ACT: COMMERCIAL ACTIVITY AND DIRECT EFFECT 
REVISITED 
In an attempt to refinance its debt and stabilize its currency, Argentina 
issued government bonds to its foreign creditors. These bonds, or "Bonods," 
provided for the payment of both principal and interest in U.S. dollars, through 
transfer on the London, Frankfurt, Zurich, or New York markets. As the Bonods 
began to mature, however, Argentina determined that it lacked sufficient foreign 
exchange to retire them, and unilaterally extended the time for payment of the 
Bonods. Respondents, two Panamanian corporations and a Swiss bank, refused 
to accept the rescheduling and insisted on full payment of their Bonods, 
specifying that such payment should be made in New York. When Argentina 
failed to comply with their demands, respondents filed suit for breach of contract, 
relying on the Foreign Sovereign Immunities Act of 1976 (FSIA or Act) as the 
basis for U.S. federal court jurisdiction. Argentina moved to dismiss the action 
for lack of subject-matter jurisdiction, Jack of personal jurisdiction, and forum 
non conveniens. The United States District Court for the Southern District of 
New York denied these motions, holding that Argentina was not entitled to 
sovereign immunity under U.S. Jaw because its actions constituted "commercial 
activity," an exception to sovereign immunity under the Act.' Argentina 
appealed, asserting that it had acted as a sovereign entity in issuing the Bonods 
and rescheduling the payments, and was therefore immune from jurisdiction. The 
Second Circuit Court of Appeals affinned the district court's finding of 
commercial activity, and also held that the activity had sufficient "direct effect" 
in the United States to satisfy the requirements of the exception.2 The United 
States Supreme Court affirmed, holding that Argentina is subject to jurisdiction 
in the U.S. under the FSIA due to the commercial nature of its actions and the 
direct effect of these actions in the United States. Republic of Argenlina v. 
Weltover, Inc., 112 S.Ct. 2160 (1992). 
The U.S. Supreme Court has determined that the Foreign Sovereign 
Immunities Act> "provides the sole basis for obtaining jurisdiction" over a 
foreign sovereign.' The Act codifies the "restrictive" approach to sovereign 
1. Weltover, Inc. v. Republic of Arg., 753 F. Supp. 1201, 1206 (SD.N.Y. 1991). 
2. Weltover, Inc. v. Republic of Arg., 941 F.2d 14S, ISl-S3 (2d Cir. 1991). 
3. 28 u.s.c. H 1602-1611 (1976). 
4. Stt Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 439 (1989). 
288 TUUNE J. OF INTL & COMPARATIVE LAW [Vol. 1: 287 
immunity, which recognizes jurisdictional immunity of a foreign sovereign with 
regard to its public acts (jure irnperii), but not with respect to private acts (jure 
gcstionis).5 Shortly before the Act was passed, the Supreme Court endorsed this 
approach in Alfred Dunhill of London, Inc. v. Republic of Cuba, holding that a 
foreign sovereign acting as a private entity in the marketplace is not entitled to 
immunity.' 
In order for federal courts to assert jurisdiction, a claim against a foreign 
sovereign must fall within one of the FSIA 's specified exceptions to sovereign 
immunity.7 Section 160S(a)(2) of the Act specifically states that U.S. federal 
courts will not grant immunity to a foreign sovereign Hwhen an act is perfonned 
oiasitk tM territory of tM United States in connection with a commercial activity 
of tMforeign state elsewMre and causes a direct effect in the United States."' 
Commercial activity is defined generally in the FSIA as a regular course of 
commercial conduct or a particular commercial transaction or act.9 The FSIA 
further requires that commercial activity be determined by reference to the nature 
of the act, not by reference to the purpose for which it is undertaken. '0 
The Act, therefore, provides specific guidelines for finding a commercial 
activity exception to a claim of sovereign immunity. Congress· intent during the 
formation of the Act, however, was to grant the courts a great deal of latitude in 
dctennining what constitutes commercial activity for the purposes of sovereign 
immunity.11 The result of these divergent intentions has been much litigation 
and confusion regarding the meaning of commercial activity in the context of the 
5. Su l.eUer of Jack 8. Tate, Acting Legal Advisor, to Acting Attorney General, 26 DEP"T STATE 
Buu. 984 (1952). The traditional rule granted a foreign sovereign absolute immunity from suit in 
the U.S. The Schooner Exchange v. M'Faddon, 11 U.S. (7 Cranch) 116 (1812). 
6. 425 U.S. 682, 701-05 (1976) (emphasizing that a foreign government, when acting in a 
OOllllDercial capacity, docs not exercise powers peculiar to sovereigns, but only those that can also 
be exercised by a private citizen). 
7. Verlinden 8 .V. v. Cenlral Banlt of Nig., 461 U.S. 480, 489 (1983). Exceptions to immunity 
include, in put, (1) waiver of inununity, (2) commercial activities having a nexus with the U.S., (3) 
actiom involvina property expropriated in violation of international law, (4) inherited, gift, or 
immovable property located in the U.S., (5) noncommercial tol1S occurring in the U.S., 
and (6) maritime liens. ~t 28 u.s.c. f 1605. 
8. 28 U.~.C. I 160S(a)(2) (emphasis added). The commercial activity exception also applies to a 
~~ carried on in the U.S. by the foreign state or an act performed in the U.S. in 
connection with a corrmerclal activity of the foreign state elsewhere. 
9. Id. I 1603(d). 
10. Id. 
11. H.R.. REP. No. 1487, 94th Cong., 2d Sess. 16 (1976), rtprinttd In 1976 U.S.C.C.A.N. 6604. 
1993) RECENT DEVEWPMENTS 289 
FSIA. 
The legislative history of the FSIA reveals the extent to which a foreign 
sovereign's activities constitute commercial activity under the Act.12 The House 
of Representatives Report on the FSIA indicates that a commercial act would 
include, inter alia, a foreign government's sale of a service or product, the 
borrowing of money, or an activity customarily engaged in for profit. u 
Fwthennore, after much debate, Congress specifically concluded that the sale of 
bonds to the public is an activity that is commercial in nature, and that it should 
therefore be treated like any other commercial transaction.14 
In accordance with the explicit requirements of the FSIA, some courts 
have refused to grant sovereign immunity when a state's conduct amounts to an 
act that is commercial in nature. In Shapiro v. Republic of Bolivia, the Second 
Circuit Court of Appeals stated that issuance of public debt is a commercial 
activity within the meaning of Section 1605(a)(2).1' Therefore, the Bolivian Air 
Force's issuance of promissory notes guaranteed by the Central Bank of Bolivia 
was found to constitute a commercial activity.'6 The Second Circuit's narrow 
interpretation of the FSIA had previously been demonstrated in Texas Trading 
& Milling Corp. v. Federal Republic of Nigeria, in which Nigeria's contracting 
to buy cement from U.S. suppliers was found to constitute a commercial activity, 
even though the purpose of the contract was to construct infrastructure." 
Similarly, the D.C. Circuit Court in Practical Concepts, Inc. v. Republic of 
Bolivia looked to the nature of the specific act (the contract for sale of services) 
rather than to the governmental nature of the entity or its purpose, to determine 
that the commercial exception applied to an action for breach of contract.'' 
Although the FSIA requires that the nature of the activity be examined 
to detennine whether an act is commercial, some courts have nevertheless 
focused on whether the purpose of the government· s act was to serve a sovereign 
obligation or objective. For example, in De Sanchez v. Banco Central de 
Nicaragua, the Fifth Circuit Court of Appeals held that the Nicaraguan Central 
Bank's issuance of a check payable in U.S. dollars was a sovereign act, rather 
12. Id. 
13. Id. 
14. Id. at 10. 
15. 930 P.2d 1013, 1018 (2d Cir. 1991). 
16. Id. al 1018-19. 
17. 647 P.2d 300, 310 (2d Cir. 1981), cm. dtnitd, 4S4 U.S. 1148 (1982). 
18. 811 P.2d IS.3, 1551 (D.C. Cir. 1987). 
290 TUUNE J. OF INT'L & COMPARA11YE LAW [Vol. l : 287 
than a commercial activity, because Nicaragua's purpose for issuing the check 
was to maintain stable exchange rates.19 The transaction was therefore not a 
simple sale of dollars which could have been perfonned by a private entity.» 
In contrast to the Practical Concepts approach, the court in De Sanchez defined 
the activity in question broadly as the "regulation and supervision of a nation's 
foreign exchange reserves," rather than a simple "sale of dollars. # 21 The court 
recognii.ed that, according to the FSIA, cormnercial activity should be determined 
by reference to the nature of the act, but further noted that "commercial acts 
themselves arc defined largely by reference to their purpose. "22 Thus, despite 
the FSIA 's explicit language, the court treated the sovereign's purpose as a 
defining characteristic of its nature. 
In determining whether an act falls within an exception to the FSIA, 
Section 1605(a)(2) also requires a court to decide whether an act has a direct 
effect in the U.S.D Unlike commercial activity, direct effects are not defined 
under the FSIA. 2A A majority of circuit courts has adopted the Restatement of 
the Foreign Relations Law of the United States (Third) (Restatement) test for 
direct effect,25 which focuses on whether the effects of the government's act in 
the U.S. arc "substantial" and "forcseeable.•lll Accordingly, several courts, 
including the N"mth Circuit in America West Airlines, Inc. v. GPA Group, Ltd., 
have held that the consequences of a foreign nation's commercial activity must 
be substantial and foreseeable in order to constitute a direct effect for the 
purposes of the FSIA.11 In particular, the court rejected the contention that 
financial loss alone is sufficient to satisfy the statute.21 The D.C. Circuit, in 
19. 770 P.2d 1385, 1393 (5th Cir. 1985). 
20. Id. 
21. Id. at 1392-93. Su also MOL, Inc. v. Peoples Republic of Bangladesh, 736 F.2d 1326, 1329 
~9th Cir. 1984) (holding that contracting for the sale of rhesus monkeys was a sovereign act because 
Us purpcse wu to accomplish the "uniquely sovereign fwlct.ion• of regulating impor1S and exports 
u well u natural l'CSOW'CeS). 
22. IH SancJin, 770 P.2d at 1393. 
23. 28 U.s.c. t 1605(aX2). 
24. H.R. REP. No. 1487, SMpra 1101e 11, at 19. 
2S. Rl!sTAT1!Ml!NT CTHw>) OP THI! PORl!ION Rl!u.nONs LAW OP nm UNITED STATES t 18 (1965). 
26· R.enana B. Abnms, Comment. TM Forel1n Sowrel1n llfllfllUllttes Act: lnconslstenclu Ill 
Application of die CommtrclalAcltvlty Direct Ejftct Ezctptlon, 5 f!Moay lHl"L L Rsv. 227 (1991). 
27. 877 p .2d 793, 799 (9th Cir. 1989). 
28. Id. 
1993] RECENT DEVEWPMENTS 291 
udan v. Kingdom of Saudi Arabia, also applied the Restatement test to reject a 
finding of direct effect based solely upon financial loss.29 The court required 
financial loss to be accompanied by a Hlegally significantH event in the United 
States that is foreseeable and substantial in order to satisfy the direct effect 
requirement. JO 
Other courts have rejected the Restatement test on the grounds that there 
is no evidence that Congress intended this rigid approach to be determinative in 
the direct effect analysis. In Texas Trading, the Second Circuit held that 
financial loss to an American corporation resulting from Nigeria's actions was 
sufficient to constitute a direct effect, where a causal link existed between 
Nigeria's breach of payment and the loss in the United States.>• The court 
further held that Nigeria 's breach had an effect in the U.S. because the 
underlying contract contained a clause specifying that payment was to be made 
in the United States.>2 The court's approach in Texas Trading may be viewed 
as more consistent with the legislative purpose of facilitating access to United 
States courts in suits against foreign sovereigns," but the majority of circuit 
courts rejects this financial loss/causal connection test in favor of the more rigid 
Restatement approach.:w 
In the noted case, the Supreme Court acknowledged that the FSIA leaves 
the commercial character of an activity "largely undefined."15 The Court 
recognized, however, that the Act codifies the restrictive theory of sovereign 
immunity discussed in Dunhill.36 The plurality in Dunhill determined that when 
a foreign state participates in the market in the same manner as a private entity, 
sovereign immunity does not apply because the sovereign is not exercising 
powers peculiar to its authority, but only those that may be exercised by private 
29. 849 F.2d !Sil, ISl4 {D.C. Cir. 1988). 
30. Id. at IS 14-IS. The cowt suggests, however, that this requirement may be fulfilled if the contnd 
specifies a particular location In the U.S . where the money would be forwarded. Id. at ISIS, n.2. 
31. Texas Trading, 647 F.2d at 312. The opinion does not apply to financial loss to an individual. 
32. Id. 
33. Abnims, supra note 26, at 230-3 t. 
34. Id. For other variants of the direct effects analysis, su gtntrally Roben 8 . Hagedorn, Tiit 
Fortlgn Sovtrtlgn lmm"nitits Act: Dtfinlng Commtrclal Activity and Dirtct Effuts J"rl.sdlcrton. 2S 
SANrA Cl.ARAL REv. IOS (198S). 
JS. Wtltovtr, 112 S.CI. at 216S. 
36. Id. 
292 TULANE J. OF INT'L &: COMPARATIVE U W [Vol. 1: 287 
citizens as well.17 The Weltover Court afforded great significance to Dunhill, 
concluding that when a foreign sovereign acts as a private participant in the 
market, its actions are commercial for purposes of the FSIA.31 Thus, the issue 
before the Court was whether the actions perfonned by Argentina could also be 
perfon:ned by a private party.)9 The Bonods were Hgarden varietyH debt 
instruments that could be held, negotiated, and traded by private parties; 
therefore, the Court concluded that Argentina's issuance of Bonods was a 
commercial activity.00 
In making its detennination, the Court looked to and strictly construed the 
language of the FSIA. Section 1603(d) of the Act provides that the nature of an 
act, and not its purpose, should detennine its commercial character." The 
Court adhered to this requirement, and rejected Argentina's contention that a 
court must, notwithstanding this provision, consider the context of a transaction 
to determine whether it is commercial.41 Argentina argued that the transactions 
in which the Bonods were issued did not have Hthe ordinary commercial 
consequences of raising capital or financing acquisitions."43 The Court noted 
that this contention may have been based on the purpose of the act, in which 
case it would not be a valid argument under the FSIA." The Court 
circumvented this problem by noting that private parties also issue bonds to 
refinance debt, and that Argentina's actions were therefore not those of a 
sovereign deserving of judicial immunity." The Court did not expressly affirm 
the per se rule established in Shapiro that issuing public debt is a commercial 
activity within the meaning of the FSIA, but did hold that the issuance of debt 
instruments by a sovereign acting in a private manner is commercial in nature 
regardless of its purpose.46 
The Court explicitly rejected the test employed by the Fifth Circuit in De 
37. DunhJIJ, 425 U.S. at 703-0S. 
38. Wtluivtr, 112 S.Ct. at 2166. 
39. Id. 
40. Id. 
41. 28 u.s.c. t 1603(d). 
42. Wtlzowr, 112 S.Ct. at 2167. 
43. Id. 
44. Id. 
45. Id. 
46. Id. 
1993) RECENT DEVEWPMENTS 293 
Sanchez, which concluded that the nature of an act could not be ascertained 
without inquiring into its purpose.41 Argentina relied on De Sanchez in 
asserting that the distinction between nature and purpose was merely a 
fonnality." The Court stated that this argument is "squarely foreclosed by the 
language of the FSIA," which "unmistakably commands" that purpose be 
separated from nature.~ Accordingly, it is insignificant that Argentina entered 
the market in order to alleviate a "domestic debt crisis" or the "nation's critical 
shortage of foreign exchange;" it is relevant only that Argentina participated like 
a private actor.JO The Court therefore concluded that Argentina 's issuance of 
the Bonods constituted commercial activity under the FSIA.' 1 Argentina's 
activity was thus subject to the jurisdiction of the United States. 
The Court also rejected the Restatement's requirement of both a 
"substantial" effect and a "direct and foreseeable" result in order to satisfy the 
direct effect requirement of the commercial activity exception." Thus, the 
Court denied any unexpressed requirement of substantiality or foreseeability in 
the Act or its legislative history. Instead, the Court endorsed the Second Circuit 
approach, under which an effect is direct if it follows "as an immediate 
consequence of the defendant's ... activity."" The Court concluded that 
rescheduling payment of the Bonods directly affected the U.S. because New 
York was designated as the "place of performance for Argentina's ultimate 
contractual obligations.,,,. Moreover, "[m]oney that was supposed to have been 
delivered to a New York bank for deposit was not forthcoming."" The Court 
therefore held that this effect satisfied the Act's requirement of a direct effect..!6 
The Supreme Court's decision in We/rover marks a significant step 
toward resolving the conflicts surrounding the commercial activity exception to 
immunity under the Foreign Sovereign Immunities Act. The Court's decision to 
47. Weltovu, 112 S.Ct. at 2 167. 
48. Id. 
49. Id. 
SO. Id. 
SI. Id. at 2167-68. 
S2. We/rover, 112 S.Ct. at 2168. 
S3. Id. 
S4. Id. 
SS. Id. 
S6. Id. 
294 TUV.NE J. OF JNT'l &: COMPARATIVE LAW [Vol. 1: 287 
look solely to the nature of the activity to detennine its commercial character 
embraces "both the principles of the restrictive theory of immunity as well as the 
broad purposes behind the enactment of the FSIA, HS1 resulting in a much-
needed uniform application of the Act. Although the Act's legislative history 
indicates that courts should have great latitude in detennining whether an act was 
commercial," the Wtltover decision clearly recognizes that the courts cannot 
overtly ignore the Act's statutory language. 
The Court's analysis of direct effects similarly resolves a split among the 
lower courts. The Court's holding that a substantial and foreseeable result is not 
essential to meet the direct effects requirement seems contrary to the legislature's 
intent that "commercial conduct abroad having direct effects within the United 
States" be subject to jurisdiction in the U.S. consistent with the principles of the 
Restatement." However, although the Court did not follow the approach 
chosen by the majority of circuit courts, its decision appears to be reasonable in 
light of the fact that no rigid test is explicitly slated in the FSIA. We/rover 
instead adopts the Second Circuit test, which defmes a direct effect as that which 
follows as an "immediate consequence" of the sovereign's activity.60 
The court in Wtltover resolves the previous inconsistencies in the case 
law with regard to both the distinction between nature and purpose and the direct 
effect analysis. The decision provides workable guidelines for lower courts to 
follow in the future and signifies a promising step toward achieving predictability 
and uniformity in the law regarding the commercial activity exception to foreign 
sovereign immunity. 
SUSAN L. FORNARO 
57. Id. 
58. R.R. REP. No. 1487, :1Mpra noce 11, at 16. 
59. Id. 
60. Su Wtllover, 112 s.a. at 2168. 


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