Direct Effect Requirement

“Direct Effect” Requirement in 2011

United States views on international law (based on the document “Digest of U.S. Practice in International Law”): In December 2011, the United States filed a brief as amicus curiae in the Supreme Court of the United States advocating denial of the petition for certiorari in Republica Bolivariana de Venezuela v. DRFP L.L.C., d/b/a Skye Ventures, No. 10-1144. Petitioner Venezuela sought certiorari after the lower court denied its motion to dismiss the case and the Court of Appeals for the Sixth Circuit affirmed that decision as to Venezuela's claim that the conduct at issue did not cause “a direct effect in the United States” as required under the FSIA. Respondent Skye Ventures originally filed suit against Venezuela after seeking payment on bearer promissory notes issued by a Venezuelan bank (“Bandagro”) and backed by the government of Venezuela. Skye Ventures asserted that the notes were governed by the laws of Switzerland and the Uniform Rules for Collections set out in an International Chamber of Commerce (“ICC”) publication and therefore entitled the bearer to demand payment anywhere the notes were held. Excerpts of the United States brief below discuss the application of the FSIA (with footnotes and citations to the record omitted). The full text of the United States brief is available at (internet link) justice.gov/osg/briefs/2011/2pet/6invit/2010-1144.pet.ami.inv.pdf.**

Developments

A. The Sixth Circuit's Application Of The FSIA Is Correct And Is Consistent With The Decisions Of Other Courts Of Appeals 1. In Republic of Argentina v. Weltover, Inc., 504 U.S. 607 (1992), this Court examined the commercial-activity exception of the FSIA that permits the exercise of jurisdiction where an act occurring outside the United States has a “direct effect” within the United States. The Court explained that “an effect is direct if it follows as an immediate consequence of the defendant's * * * activity,” and that Section 1605(a)(2) does not contain “any unexpressed requirement of substantiality or foreseeability.” Id. at 618 (citation and internal quotation marks omitted). The Court then applied that standard to government bonds issued by Argentina, which provided for payment “through transfer on the London, Frankfurt, Zurich, or New York market, at the election of the creditor.” Id. at 609-610. Because the bondholder had chosen New York as the place of payment, the Court concluded that “New York was thus the place of performance for Argentina's ultimate contractual obligations.” Id. at 619. The sovereign's nonpayment therefore “necessarily” created the requisite direct effect under Section 1605(a)(2) because “[m]oney that was supposed to have been delivered to a New York bank for deposit was not forthcoming.” Ibid.

Details

The court of appeals' decision is a straightforward application of Weltover. The court of appeals first addressed whether the provisions of the Bandagro notes gave respondent the right to designate the United States as the place of payment. The court concluded that, by providing that the notes are governed by Swiss law and ICC rules, the parties had agreed that respondent “had the right to designate the United States as a place of payment of the notes,” which respondent had done. Having so answered that antecedent question, the court correctly viewed the circumstances as analogous to those presented in Weltover: as in that case, the notes at issue gave the holder the right to choose the place of payment on the notes, and the holder chose the United States. The court therefore concluded, consistent with Weltover, that when petitioners failed to pay on the bonds, “money that was supposed to have been delivered to [respondent] at its office in Columbus was not forthcoming, causing a direct effect in the United States” under Section 1605(a)(2).

Petitioners argue that the Sixth Circuit erroneously found a “direct effect” in the United States “simply because [the notes] do not specifically preclude payment in the United States.” The premise of petitioners' argument is incorrect, however, because the court did not construe the notes as silent regarding place of payment. Rather, the court held that the notes' terms reflected an affirmative agreement that permitted the holder to choose to demand payment in the United States. The question whether Weltover would permit a court to find a “direct effect” under Section 1605(a)(2) based on notes that are altogether silent as to the place of payment is thus not presented here.And, as discussed further below, whether the court correctly construed the notes' provisions as addressing the place of payment is not a question that independently warrants this Court's review.

More about the Issue

2. Petitioners contend that the courts of appeals are “irreconcilably fractured” regarding when, under Weltover, a foreign state's refusal to make payment at a United States location causes a direct effect in the United States. Petitioners are incorrect.

Applying Weltover, the courts of appeals that have addressed the issue have unanimously concluded that a foreign sovereign's nonpayment in the United States on a debt instrument or contract that permits the payee to designate a United States locale as the place of payment, when the payee has made such a designation, creates a “direct effect” in the United States under Section 1605(a)(2). See Hanil Bank v. PT. Bank Negara Indonesia, 148 F.3d 127, 129-130, 132 (2d Cir. 1998) (where the instrument authorized the plaintiff to choose any location as the place of payment, including the chosen locale of New York, defendant's failure to pay caused a direct effect under Weltover, and there was no need for the instrument expressly to designate the United States); Adler v. Federal Republic of Nigeria, 107 F.3d 720, 727 (9th Cir. 1997) (an agreement requiring only that the plaintiff utilize a “non-Nigerian bank” permitted the plaintiff to elect a bank in New York as the place of payment, and Nigeria's failure to satisfy contractual obligations in New York “necessarily had a direct effect in the United States” under Weltover); see also Keller v. Central Bank of Nigeria, 277 F.3d 811, 817-818 (6th Cir. 2002) (agreeing with courts that “found a direct effect when a defendant agrees to pay funds to an account in the United States and then fails to do so”), abrogated on other grounds by Samantar v. Yousuf, 130 S. Ct. 2278 (2010).

The courts of appeals also generally agree that if a contract or debt instrument does not contemplate that the noteholder may specify a place of payment within the United States, or the noteholder designates a location outside the United States, there is not the requisite direct effect within the United States. See, e.g, United World Trade, Inc. v. Mangyshlakneft Oil Prod. Ass'n, 33 F.3d 1232, 1237-1238 (10th Cir. 1994) (finding no direct effect where a contract specified Paris as the place of payment and did not contemplate that either party would perform any part of the contract in the United States, even though the contract's provision that payment be made in U.S. dollars meant that a U.S. bank might be incidentally involved in converting payment to dollars), cert. denied, 513 U.S. 1112 (1995); Goodman Holdings v. Rafidain Bank, 26 F.3d 1143, 1146-1147 (D.C. Cir. 1994) (no direct effect when the only connection to the United States was that some of the payments were made from U.S. bank accounts, and “[n]either New York nor any other United States location was designated as the 'place of performance' where money was 'supposed' to have been paid”), cert. denied, 513 U.S. 1079 (1995). But see Voest-Alpine Trading USA Corp.v. Bank of China, 142 F.3d 887, 889, 896 (5th Cir.) (Voest-Alpine) (finding a direct effect caused by nonpayment in the United States on a contract that was silent as to the place of payment, when the foreign sovereign acknowledged a practice of sending the funds to the location designated by debtholder), cert. denied, 525 U.S. 1041 (1998).

Here, because the Sixth Circuit concluded that the Bandagro notes permitted respondent to designate the United States as the place of payment, the court's ruling that petitioners' nonpayment after respondent chose the United States caused a direct effect in the United States is consistent with the decisions addressing similar agreements. See, e.g., Hanil Bank, 148 F.3d at 132.

“direct Effect” Requirement in 2011

United States views on international law (based on the document “Digest of U.S. Practice in International Law”): Nonetheless, petitioners urge that review is warranted because a conflict exists between those courts that require a plaintiff to show that the foreign sovereign performed a “legally significant act” within the United States in order to establish a direct effect within the meaning of Section 1605(a)(2), and those courts, like the Sixth Circuit, that eschew such a requirement. Although petitioners are correct that the courts of appeals have disagreed as to whether a “legally significant act” is necessary after this Court's Weltover decision, that disagreement is not implicated here because the outcome in this case would be the same under either approach. The Second and Ninth Circuits, which require a legally significant act in the United States, have held that such an act occurs when—as the courts below found—a sovereign fails to make payments on a debt instrument that permits the holder to designate any place of payment and the holder has chosen the United States. See Hanil Bank, 148 F.3d at 129-130, 133 (when plaintiff could choose any place of payment and chose the United States, the “most legally significant act—the breach of contract—occurred in the United States”); Adler, 107 F.3d at 727 (finding that nonpayment to U.S. bank, when agreement provided that payment would be made to a “non-Nigerian bank,” was a legally significant act).

More about “direct Effect” Requirement

Finally, petitioners argue that contrary to the Sixth Circuit's decision, some courts of appeals have held that the debt instrument must “expressly specify the United States as a place of payment or authorize the plaintiff to designate the place.” None of the cases on which petitioners rely, however, suggests that an agreement must expressly name the United States as the place of payment. See, e.g., Guevara v. Republic of Peru, 608 F.3d 1297, 1309-1310 (11th Cir.) (concluding that plaintiff's failed attempt, from the United States, to claim a reward offered and administered in Peru did not create a direct effect), cert. denied, 131 S. Ct. 651 (2010); Virtual Countries, Inc. v. Republic of South Africa, 300 F.3d 230, 239 (2d Cir. 2002) (noting that in a previous case, “[s]atisfaction of the geographical jurisdictional nexus * * * depended on the fact that the contract stipulated performance in New York,” but not suggesting that such an express stipulation was the only way to create the necessary direct effect).

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See Also

• Privileges
• Immunities
• Foreign Sovereign Immunities
• Exceptions To Immunity
• Commercial Activity

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Notes and References

1. ** Editor's note: The Supreme Court issued its decision denying certiorari in the case in January 2012.

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Notes and References

1. ** Editor's note: The Supreme Court issued its decision denying certiorari in the case in January 2012.