Transnational Litigation Blog https://tlblog.org/ Forum for scholars and practicing lawyers to explore issues and their relevance. Mon, 05 Dec 2022 20:52:50 +0000 en-US hourly 1 https://tlblog.org/wp-content/uploads/2022/03/cropped-globe-fav-32x32.png Transnational Litigation Blog https://tlblog.org/ 32 32 The Executive Does Not Control Common Law Immunity https://tlblog.org/the-executive-does-not-control-common-law-immunity/?utm_source=rss&utm_medium=rss&utm_campaign=the-executive-does-not-control-common-law-immunity Tue, 06 Dec 2022 13:00:12 +0000 https://tlblog.org/?p=3371 A previously reported on TLB, the Supreme Court granted certiorari in Türkiye Halk Bankasi, A.S. v. United States, to decide whether a bank owned by Turkey is entitled to foreign state immunity from federal criminal prosecution.  Halkbank was indicted for evading sanctions against Iran. Both lower courts denied immunity to Halkbank, reasoning in part that even if the Foreign Sovereign Immunity Act (FSIA) applies to criminal prosecutions – an important and unresolved question – an exception to immunity applies in this case.

The lower courts also reasoned that if the FSIA does not apply, the executive branch makes immunity determinations that bind the courts. We disagree.  In an amicus brief filed in support of neither party, we explain that in both civil and criminal matters the executive branch lacks the constitutional power to resolve pending cases by directing the courts to confer or deny immunity.

The Supreme Court held in Samantar v. Yousuf (2010) that the “common law” of foreign sovereign immunity governs in cases against foreign entities when the FSIA does not apply.  In subsequent cases, the U.S. government has argued, as it does in Halkbank, that it controls common law immunity.  This means that the executive can make case-by-case decisions about which defendants are entitled to immunity and which are not, and even that that courts must follow the executive’s views on immunity when it does not make a case-specific recommendation.  The government’s position runs afoul of separation of powers, lacks foundation in history and precedent, is not supported by the President’s claim settlement or the recognition powers, and has striking functional weaknesses.

Separation of Powers

As the Supreme Court held in Verlinden v. Central Bank of Nigeria (1983), the Foreign Commerce Clause gives Congress the power to decide “whether and under what circumstances foreign nations should be amenable to suit in the United States.” Pursuant to that authority, Congress adopted the FSIA.  But the statute does not govern every immunity issue involving foreign government defendants, including the immunity foreign government officials, as the Court held in Samantar.  When the statute does not apply, federal common law governs.  Federal courts are constitutionally empowered to develop and apply federal common law in the narrow set of cases involving foreign state and foreign official immunity that are not covered by the FSIA.

The executive branch, by contrast, lacks the power to make law, including the power to pick winners and losers in pending cases.  The Supreme Court observed in Youngstown Sheet & Tube Co. v. Sawyer (1952) that the President’s constitutional power to faithfully execute the law “refutes the idea that he is to be a lawmaker.”  The Court emphasized the President’s lack of power to make law in foreign relations cases when it held in Medellin v. Texas (2008) that the President could not give domestic legal effect to a non-self-executing treaty obligation by directing the outcome of specific cases. The Court described the President’s foreign policy interests as “plainly compelling” but reasoned that those considerations “do not allow us to set aside first principles.”  Those first principles provide that “under our constitutional system of checks and balances, ‘[t]he magistrate in whom the whole executive power resides cannot of himself make a law.’” (quoting The Federalist No. 47).  And quoting Marbury v. Madison (1803), the Court recently reiterated that it is the independent judiciary that has the ‘province and duty . . . to say what the law is’ in particular cases and controversies.”

To be sure, federal courts (unlike state courts) do not make and apply general common law.  But federal courts do make federal common law in some narrow but well-settled contexts in which Congress has not acted, including for issues such preclusion and forum non conveniens which – like foreign sovereign immunity – are procedural. Federal courts also apply federal common law to other discrete issues involving the actions of foreign governments.  For example, the act of state doctrine precludes courts in the United States “from inquiring into the validity of the public acts a recognized foreign sovereign power committed within its own territory.”  Federal common law also governs the substantive liability of a foreign state for the actions of its instrumentalities (and vice versa), an issue not specifically addressed in the FSIA.  Federal judicial power to develop and apply common law immunity principles fits comfortably within this body of precedent.  Indeed, the Supreme Court has unanimously rejected the executive’s argument that it should control the application and development of the act of state doctrine.  In Halkbank, it should do the same for immunity.

History & Precedent

Federal courts have resolved issues of foreign state and official immunity since the early days of the Republic.  They at times deferred to the executive branch on questions of fact (such as who owned a vessel) or politics.  But it was the federal judicial branch that controlled immunity law and its application in particular cases, as documented by G. Edward White in The Transformation of the Constitutional Regime of Foreign Relations.

The executive generally cites a pair of World War II admiralty cases in support of its power to make binding immunity determinations.  But the language in those cases was dicta and neither applies here. Republic of Mexico v. Hoffman (1945) was an in rem action against a vessel owned by the Mexican government but in the possession of private company. The Court found the executive’s failure to suggest immunity “controlling” as an indication of a “national policy not to extend immunity” to vessels owned but not possessed by foreign states. But the Court also held that the distinction between ownership and possession was supported by the “overwhelming weight of authority.” That authority alone provided adequate basis for the Court’s decision.

In Ex Parte Peru (1943), the executive suggested immunity because it had apparently already resolved the case through its claim-settlement power. The Court reasoned that, when the Secretary of State elects “to settle claims against the vessel by diplomatic negotiations between the two countries rather than by continued litigation,” the Court must accept that settlement and “the plaintiff is entitled to the relief obtained through negotiations.” Those considerations do not apply in Halkbank or in the other modern cases in which the executive seeks to control immunity.

Recognition & Claim Settlement

The executive branch’s power to resolve other issues related to foreign policy does not support its power to resolve immunity issues.  For example, the executive’s “narrow and strictly limited authority to settle international claims disputes” is a practice that dates back over 200 years, and one that Congress implicitly approved in the International Claims Settlement Act of 1949. The judiciary’s deference to executive immunity determinations, by contrast, began only in the late 1930s and ended in 1976 when Congress adopted the FSIA at the executive’s request.

The President also has the sole “power to recognize other nations.”  But, as the Court has noted, determining recognition is different than determining the legal consequences that may (or may) not flow from recognition.  Immunity is not the same as recognition, and immunity may apply whether or not the President has recognized the entity in question.  The recognition power does not include the power to make immunity determinations.

Functional Problems

The Supreme Court has repeatedly noted that the FSIA was enacted to solve the problems created by executive control of immunity determinations. That control led to foreign governments pressuring the executive to decide in their favor – even if the law was against them. The executive sometimes made inconsistent immunity determinations not aligned with its overall policy; courts were unsure how to resolve cases when the executive did not act; and the practice generally led to unfair, inconsistent, and unpredictable outcomes. In short, “the old executive-driven, factor-intensive, loosely common-law-based immunity regime” created “bedlam.”

Conclusion

The Halkbank case involves multiple issues that include the scope of the FSIA and questions of international law.  The Court may never reach the question of executive control over immunity.  The merits briefs below devoted little space to the question, but both the district court and the Court of Appeals nevertheless concluded that the executive has the startling and ahistorical power to dictate immunity law to the federal courts. The Supreme Court should not follow their lead.  If it reaches the issue of executive power over immunity, the Court should give the issue full and careful analysis, with careful attention to the structure of the Constitution, historical practice, and well-known and well-documented functional problems with executive control over common law immunity.

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Solicitor General Recommends Denial of Cert in NSO v. WhatsApp https://tlblog.org/solicitor-general-recommends-denial-of-cert-in-nso-v-whatsapp/?utm_source=rss&utm_medium=rss&utm_campaign=solicitor-general-recommends-denial-of-cert-in-nso-v-whatsapp Mon, 05 Dec 2022 13:00:33 +0000 https://tlblog.org/?p=3355 On November 21, the Solicitor General (SG) filed a brief recommending that the Supreme Court deny cert in NSO Group Technologies Ltd. v. WhatsApp Inc. NSO, an Israeli company that makes surveillance technology, claims that it is entitled to immunity from suit under federal common law because it acted as the agent of foreign states. The SG’s brief cites several reasons to deny cert: the State Department has not suggested immunity in this case; there is no established practice of granting immunity to agents of foreign states; no foreign state has requested immunity for NSO; NSO has not even identified the foreign states for which it was working; and there is no circuit split on the question.

But the SG refuses to endorse the Ninth Circuit’s “categorical holding” that the Foreign Sovereign Immunities Act (FSIA) occupies the field with respect to immunity for entities, “which would foreclose the Executive Branch from recognizing the propriety of an immunity in a particular context in the future even if such a recognition were found to be warranted, including by developments in international law or practice in foreign courts.” The SG’s “never say never” position here is characteristic of a troubling trend in immunity cases. The executive branch consistently strives to preserve its own discretion to suggest immunity in particular cases, recreating the dysfunctional system that led Congress to pass the FSIA in the first place.

Background

In 2019, the messaging platform WhatsApp sued NSO, alleging that it had unlawfully installed spyware on devices of WhatsApp users. NSO claimed immunity from suit because it acted as an agent for undisclosed foreign governments.

The Ninth Circuit held that the FSIA “occupies the field of foreign sovereign immunity as applied to entities and categorically forecloses extending immunity to any entity that falls outside the FSIA’s broad definition of ‘foreign state.’” The FSIA defines “foreign state” to include “any entity” that “is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interests is owned by a foreign state or political subdivision thereof.” According to the Ninth Circuit, “[i]f an entity does not fall within the Act’s definition of ‘foreign state,’ it cannot claim foreign sovereign immunity. Period.” (Disclosure: I joined an amicus brief with Chimène Keitner and Sarah Cleveland arguing for this result.)

The CVSG Brief

NSO filed a petition for cert, and the Supreme Court called for the views of the Solicitor General (CVSG). The CVSG brief recommends that the Court deny cert. First, as further discussed below, the executive branch’s position has been that, in cases not governed by the FSIA, courts in the United States are bound to defer to the State Department’s case-specific immunity determinations and to principles of immunity articulated by the executive branch. In this case, however, the State Department made no case-specific determination and has not developed a practice in other cases of suggesting immunity for entities that act as agents of foreign states.

Second, no foreign government requested immunity for NSO. Indeed, NSO has not even identified the foreign governments for which it was working. Moreover, while the case was pending, the United States added NSO to its Entity List, accusing NSO of “suppli[ng] spyware to foreign governments that used these tools to maliciously target government officials, journalists, businesspeople, activists, academics, and embassy workers.” The SG also disagreed with NSO’s assertion that the Ninth Circuit’s decision threatened the United States’ ability to claim immunity for its own contractors abroad under “applicable law,” a subtle acknowledgment that the immunity of U.S. contractors in foreign courts will be governed by foreign law.

Third, the SG saw no conflict between the Ninth Circuit’s decision and the Supreme Court’s decision in Samantar v. Yousuf or the decisions of other circuits. In Samantar, the Court held that the FSIA did not govern the immunity of foreign officials, which remains subject to federal common law. The SG (correctly) reads Samantar as limited to natural persons and as not addressing the immunity of entities like NSO. Nor did the SG see any conflict with the D.C. Circuit’s decision Broidy Capital Management v. Muzin, which did not directly address the immunity of entities, or with the Fourth Circuit’s decision in Butters v. Vance International, Inc., which involved a claim of derivative immunity under the FSIA. These reasons are more than enough for the Supreme Court to deny cert.

Never Say Never

But the SG does not agree with the Ninth Circuit’s holding that the FSIA deals comprehensively with the immunity of entities, so that “[i]f an entity does not fall within the Act’s definition of ‘foreign state,’ it cannot claim foreign sovereign immunity.” The brief says:

The United States is not prepared at this time to endorse that categorical holding, which is not necessary to resolve this case—and which would foreclose the Executive Branch from recognizing the propriety of an immunity in a particular context in the future even if such a recognition were found to be warranted, including by developments in international law or practice in foreign courts.

Of Negative Inferences

Although the SG’s brief acknowledges that the FSIA’s grant of immunity to some entities might create a negative inference that immunity was not available for other entities, it argues that such an inference is appropriate only if there was reason to think that Congress considered the possibility and rejected it. The brief characterizes the question whether an entity should be treated as a foreign state as a “status-based determination” distinct from the question of whether “conduct-based immunity” might be recognized for entities performing acts on behalf of a foreign state. Readers familiar with foreign official immunity will recognize the terms “status-based” and “conduct-based” from that context, which Chimène Keitner and I have discussed at length here.

But this is an odd distinction to make with respect with respect to the FSIA. To be sure, the FSIA requires a “status-based determination” that an entity is a “foreign state” or an “agency or instrumentality of a foreign state.” But the FSIA goes on to apply conduct-based rules to those entities, allowing them to be sued for commercial activities, expropriations in violation of international law, tortious acts in the United States, etc. By the same token, the “conduct-based” immunity of foreign officials requires an initial “status-based determination” that the defendant is a current or former foreign official. If the United States were to recognize “conduct-based” immunity for entities acting on behalf of foreign states, courts would similarly have to make a “status-based determination” that the entity was the agent of a foreign state or met some other test of status. In fact, every kind of immunity requires a “status-based” determination that the defendant falls into the class of persons covered by the immunity and, unless the immunity that follows from that status is absolute, a “conduct-based” determination with respect to the acts covered.

In short, it makes no sense to distinguish the FSIA on the ground that it is status-based, whereas the immunity NSO seeks is conduct-based. It is clear from both the text and the legislative history of the FSIA that Congress considered which entities to grant immunity and limited immunity to those entities that meet the FSIA’s definition.

Of Core Sovereign Authority

On a policy level, the executive branch seems concerned to preserve discretion to suggest immunity when “a private entity acted as the agent of a foreign state in connection with the exercise of certain core sovereign authority.” It is not clear, however, why an entity exercising “core sovereign authority” would not qualify as an “organ of a foreign state” entitled to immunity under the FSIA.

The FSIA does not define the term “organ,” and lower courts have adopted varying tests. But the tests adopted by the Second, Third, Fifth, and Ninth Circuits allow courts to consider the character of an entity’s activities. As the Restatement (Fourth) of Foreign Relations Law summarizes in § 452 comment e, all these tests consider “whether the entity engages in public (governmental) activity on behalf of the foreign state.”

The SG’s brief does not give any example of an entity exercising sovereign authority that would not be considered an “organ.” Indeed, the brief does not mention the possibility that an entity could qualify for immunity as an “organ” at all. But it is difficult to conceive of an entity exercising “core sovereign authority” that would not be considered an “organ of a foreign state” under the current tests.

Of International Law

The SG’s brief, which is also signed by the State Department’s Acting Legal Adviser, correctly observes that customary international law does not require immunity for entities that act as agents of foreign states. There is no “history of State Department suggestions of immunity on behalf of private entities acting as agents of foreign states” that would constitute state practice by the United States. And the brief notes that “there is not a well-developed international practice” either.

NSO relies on the United Nations Convention on Jurisdictional Immunities of States and Their Property, which extends immunity to “agencies or instrumentalities of the State or other entities, to the extent that they are entitled to perform and are actually performing acts in the exercise of sovereign authority of the State.” Similar language appears in the United Kingdom’s State Immunity Act and a few other countries’ immunity statutes. But the Commentaries to the Draft Articles on which the Convention is based explain that “other entities” was added to cover “exceptional cases” in which a non-governmental entity is “endowed with governmental authority” as with a bank entrusted to deal with import and export licensing. It certainly does not cover all agency relationships.

Moreover, as the SG notes, the Convention has not entered into force, and the United States “has neither signed nor ratified it.” The United States has previously stated that the Convention reflects customary international law with respect to individual officials acting in their official capacities. But the United States has not said the same with respect to the Convention’s treatment of entities, and it clearly does not do so in this brief either.

Notwithstanding the fact that customary international law does not currently require immunity for entities that act as agents of foreign states, the SG’s brief expresses concern that future “developments in international law or practice in foreign courts” might require such immunity, which the Ninth Circuit’s categorical reading of the FSIA would preclude. Such a risk is inherent in any attempt—like the FSIA—to codify rules of domestic law that overlap with rules of customary international law. In 2012, for example, the International Court of Justice held that customary international law requires immunity from suits based on the activities of armed forces during armed conflict, even on the territory of the forum state. Yet the FSIA’s territorial tort exception (28 U.S.C. § 1605(a)(5)) has no express exception for armed forces. U.S. courts would likely interpret the FSIA to be consistent with customary international law under the Charming Betsy canon. Failing that, amendment by Congress remains a possibility.

Preserving Discretion

The executive branch’s effort to preserve the possibility of immunity for entities that act as agents for foreign governments at some point in the future might seem odd since, as noted above, Congress did address the immunity of entities in the FSIA, entities exercising “core sovereign authority” are likely to be considered organs of a foreign state under the FSIA, and customary international law does not require immunity for entities acting as agents. The reason for the executive branch’s position becomes clearer when one recalls that the executive is attempting to preserve discretion for itself.

The SG complains that the Ninth Circuit’s categorical holding “would foreclose the Executive Branch from recognizing the propriety of an immunity in a particular context in the future even if such a recognition were found to be warranted, including by developments in international law or practice in foreign courts.” The key words here appear not to be “developments in international law” but rather “foreclose the Executive Branch.”

If the FSIA does not deal comprehensively with the immunity of entities from suit, then federal common law governs the open questions. The executive reads federal common law as giving it discretion to bind courts by making case-specific determinations of immunity or articulating rules that courts must apply. The SG’s brief says: “Under the common law, courts surrendered their jurisdiction when the State Department filed a suggestion of immunity, or the courts applied the established principles accepted by the State Department if the United States did not participate in the case.” This is the same position the executive takes with respect to foreign official immunity.

In both contexts, the possibility that the executive branch might grant immunity creates the certainty that it will be pressured to do so. One can only imagine the diplomatic pressure that Saudi Arabia brought to bear to secure immunity for Crown Prince Mohammed bin Salman (MBS) in the suit brought by Jamal Khashoggi’s widow, which was resolved only after several extensions from the district court and MBS’s appointment as Prime Minister.

We have seen this film before with state immunity. As the Supreme Court noted in Verlinden B.V. v. Central Bank of Nigeria, before the adoption of the FSIA, “foreign nations often placed diplomatic pressure on the State Department in seeking immunity.” Congress passed the FSIA at the behest of the executive branch “in order to free the Government from the case-by-case diplomatic pressures.” By asserting authority to make case-specific determinations and binding rules in cases not governed by the FSIA, and by reading the FSIA narrowly to create more such situations, the State Department is slowly recreating the same dysfunctional system that existed before the FSIA.

Conclusion

The SG is absolutely right that there are many reasons for the Supreme Court to deny NSO’s petition for cert. But it is disappointing that the executive branch is not ready to endorse the Ninth Circuit’s bright line rule precluding entities from claiming immunity unless they are covered by the FSIA. The SG’s brief continues a trend of the executive claiming more and more discretion over immunity determinations. The last time we saw this film, it ended in tears.

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Bifurcated Forum Selection Clauses https://tlblog.org/bifurcated-forum-selection-clauses/?utm_source=rss&utm_medium=rss&utm_campaign=bifurcated-forum-selection-clauses Thu, 01 Dec 2022 13:00:20 +0000 https://tlblog.org/?p=3345 When I was younger, I loved the Choose Your Own Adventure books. The reader was constantly asked to make decisions. Did you want to explore the basement of the haunted house? If so, turn to page 10. Or did you want to investigate the spooky noise coming from the kitchen? If so, turn to page 14. I thought of these books recently when reading through forum selection clauses in cruise ship passenger contracts (as one does). In many cases, these clauses do not select just one forum in which to resolve disputes. Instead, they stipulate that the claims must be brought in THIS forum if certain facts are true and in THAT forum if they are not. I refer to such clauses as bifurcated forum selection clauses.

At first glance, a bifurcated forum selection clause bears a passing resemblance to a Choose Your Own Adventure book. There is, however, a key difference. In the books, the reader has agency. He decides what will happen next. The cruise ship passenger reading a bifurcated forum selection clause has no agency. The cruise company has already made all the important choices.

In this post, I showcase the variety of bifurcated clauses found in cruise ship contracts. I then explain that such clauses are more common in cruise contracts than in other types of agreements because the cruise industry is heavily regulated. When a cruise company is prohibited by statute from selecting its home forum by statute, it will bifurcate the clause to limit the impact of the statute. In the majority of cases, the bifurcated clause represents an attempt on the part of the cruise line to contract around a federal statute.

The Basic Clause

To understand how a bifurcated forum selection clause operates, it is useful to begin with an ordinary, no-frills clause. One can find an example of just such a clause prepared by Hurtigruten, a Norwegian cruise line. It reads as follows:

ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THE PASSENGER TICKET, THESE TERMS AND CONDITIONS AND YOUR CRUISE SHALL BE DETERMINED EXCLUSIVELY BY THE COURTS OF OSLO, NORWAY, THE JURISDICTION TO WHICH WE AS THE CARRIER, AND YOU HEREBY SUBMIT OURSELVES.

If the passenger wants to sue Hurtigruten, it must do so in the city where the company is headquartered – Oslo, Norway. Nothing fancy. Nothing complicated.

Clauses that Hinge on the Ship’s Itinerary

MSC Cruises is an Italian cruise company. It is incorporated and headquartered in Switzerland, but its operations are based in Northern Italy. MSC’s ships sail from more than a dozen countries, including the United States. Its forum selection clause is bifurcated:

For all Cruise Packages where the Cruise portion of the itinerary includes any port in the USA or which embarks or disembarks in the USA (USA Voyages), the general maritime law of the United States shall apply supplemented by Florida state law on the subject of dramshop (alcohol) liability. Should any dispute of any kind or nature whatsoever arise between Passenger and the Company or Carrier, including but not limited to disputes regarding the interpretation or application of the present contract, or claims for loss, injury, death or damage, such matters shall be resolved exclusively by the United States District Court for the Southern District of Florida, or if such court lacks jurisdiction, then by a court of competent jurisdiction in Ft. Lauderdale, to the exclusion of any other court, venue or jurisdiction.

For all Cruise Packages where the Cruise portion of the itinerary does not include any port in the USA and which does not embark or disembark in the USA (non-USA Voyages), the applicable law to this Contract shall be Italian law, and such matters shall be resolved exclusively by the courts of Naples, Italy to the exclusion of any other court, venue or jurisdiction (emphasis added).

In essence, this clause states that (1) a lawsuit must be brought in the United States if the cruise ship calls at a U.S. port, and (2) a lawsuit must be brought in Italy if it does not.

The clause is drafted this way because mandatory federal statutes regulate the terms of cruise contracts when the ship calls at a U.S. port. To avoid having an Italian court apply U.S. maritime law, the forum selection requires claims to be brought in a U.S. court the ship calls at a U.S. port. When the ship does not stop at a U.S. port, the clause stipulates that suits must be brought in MSC’s preferred forum – Italian court – and that that court must apply Italian law. If the relevant federal statutes were to be repealed, MSC would probably revise its clause to require that all suits be brought in Italy under Italian law. Until that day arrives, however, the cruise line will continue to bifurcate its forum selection clause between the United States and Italy.

Clauses that Hinge on the Type of Claim

Holland America is a cruise company headquartered in Seattle, Washington. The dispute resolution provisions in its passenger contract vary depending on the type of claim the passenger is asserting against the cruise line. If the claim is for emotional harm, bodily injury, illness, or death, the suit must be resolved in court in Seattle, Washington. If the claim is for anything else, the suit must be resolved by arbitration in Seattle, Washington. Here is the relevant language:

(i) All claims or disputes involving Emotional Harm, bodily injury, illness to or death of any Guest whatsoever including without limitation those arising out of or relating to this Cruise Contract. . . shall be litigated in and before the United States District Court for the Western District of Washington at Seattle . . .

(ii) All claims other than for Emotional Harm, bodily injury, illness to or death of a Guest . . .  shall be referred to and resolved exclusively by binding arbitration pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act, 9 U.S.C. § 1 et seq., (“FAA”) in King County, State of Washington, U.S.A. to the exclusion of any other forum (emphasis added).

Why does the contract distinguish between types of claims? The answer lies in another federal statute. 46 U.S.C. 30509(a)(1)(b) forbids cruise companies from writing any provision into a cruise contract that would limit “the right of a claimant for personal injury or death to a trial by court of competent jurisdiction.” The effect of this statute is to bar the cruise company from requiring passengers to arbitrate personal injury claims. The statute does not, however, apply to other types of claims. If this statute were to be repealed, it seems likely that Holland America would revise its clause to require that all suits be arbitrated. Until that day arrives, however, the cruise line will continue to bifurcate its forum selection clause based on the type of claim asserted.

Clauses that Hinge on Subject-Matter Jurisdiction

The third and final example of a bifurcated forum selection clause states that a lawsuit must be brought in one court if that court has subject-matter jurisdiction and in a different court if the first court lacks such jurisdiction. The clause drafted by Carnival Cruise, headquartered in Miami, Florida, is a good example:

[Subject to certain exceptions,] it is agreed by and between the Guest and Carnival that all disputes and matters whatsoever arising under, in connection with or incident to this Contract or the Guest’s cruise, including travel to and from the Vessel, shall be litigated, if at all, before the United States District Court for the Southern District of Florida in Miami, or as to those lawsuits to which the Federal Courts of the United States lack subject matter jurisdiction, before a court located in Miami-Dade County, Florida, U.S.A. to the exclusion of the Courts of any other county, state or country (emphasis added).

Carnival would prefer, all other things being equal, to litigate in federal court. It recognizes, however, that the federal courts are (by statute and by Article III of the U.S. Constitution) courts of limited subject-matter jurisdiction. To address this issue, the company has a backup clause in its agreement stating that any claims not eligible to be brought in federal court must be brought in state court in the same city and state. Interestingly, the contract also contract a second backup clause that addresses a scenario were the county and circuit state courts in Florida lack subject-matter jurisdiction, i.e., when the claim asserted is for less than $8,000. In such situations the clause stipulates that the claim must be brought in small claims court in Miami:

Any and all disputes, claims, or controversies whatsoever, other than for personal injury, illness or death of a Guest . . . in which Guest or any other claimant asserts damages for less than $8,000 (excluding attorney fees, costs, and interest, which are not included to determine the amount at issue) must be litigated if at all before a small claims court located in Miami-Dade County, Florida, U.S.A. to the exclusion of the courts of any other county, state or country (emphasis added).

The ultimate goal of the original clause, the backup clause, and the backup, backup clause, of course, is to ensure that all claims filed against Carnival are resolved in a court located in the same city as its headquarters.

Conclusion

All things being equal, cruise companies would prefer to litigate their disputes in a familiar forum in their home jurisdiction. This explains why companies like Hurtigruten require all their passengers to sue them in Norway. In some situations, however, the ability of companies to realize these preferences is limited by statute. Where a mandatory federal statute regulates cruises calling at U.S. ports, restricts the arbitrability of certain claims, or limits the subject-matter jurisdiction of the federal courts, the cruise companies must adapt. In many cases, this adaptation takes the form of a bifurcated forum selection clause.

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A Century of Changes in Extraterritoriality https://tlblog.org/a-century-of-changes-in-extraterritoriality/?utm_source=rss&utm_medium=rss&utm_campaign=a-century-of-changes-in-extraterritoriality Wed, 30 Nov 2022 13:00:08 +0000 https://tlblog.org/?p=3338 This post is a lightly edited version of a talk given virtually on November 26, 2022, at the “International Symposium on Accelerating Changes Unseen in a Century and the Development of International Law” organized by the Chinese Academy of Social Sciences, Institute of International Law.

I am pleased to be with you today to discuss changes in the international law governing extraterritoriality during the past century. In many ways the international law of extraterritoriality has remained quite stable. But there have been significant changes, particularly in the areas of effects jurisdiction and universal jurisdiction. There has also been a trend toward viewing the traditional bases for jurisdiction to prescribe as reflecting a more general principle that requires a “genuine connection” with the regulating state. I am going to describe some of the changes in extraterritoriality over the past century and then discuss the implications of the “genuine connection” principle for sanctions and export controls.

Defining Terms

First, it is important to be clear about what we mean when we talk about “extraterritoriality.” In the United States, “extraterritoriality” refers to the application of domestic law to persons, property, or conduct outside of the state’s own territory. The kind of jurisdiction that a state exercises in cases like this is called “jurisdiction to prescribe.” It is the authority to make—or to “prescribe”—law to govern persons, property, or conduct.

Jurisdiction to prescribe is distinct from other kinds of jurisdiction that a state may exercise. It is distinct from the jurisdiction of courts to apply law to decide a case, which is called “jurisdiction to adjudicate.” And it is distinct from the authority of a state to compel compliance with law by arresting a person or by seizing property, which is called “jurisdiction to enforce.”

The distinction among these different kinds of jurisdiction is important because international law applies different rules to different kinds of jurisdiction. Jurisdiction to enforce is strictly territorial. Under international law, one state may not seize a person or property within the territory of another state. Jurisdiction to prescribe is not territorial. International law recognizes the authority of a state to regulate on many bases other than territory, including effects, nationality, passive personality, the protective principle, and universal jurisdiction. Jurisdiction to adjudicate is not limited by customary international law at all except for certain international law rules of sovereign immunity. Instead, jurisdiction to adjudicate is governed by domestic rules of personal jurisdiction.

The rules of international law that govern jurisdiction are generally rules of customary international law. Customary international law depends on a general and consistent practice of states followed from a sense of legal obligation (opinio juris). So, we must examine state practice to see when states regulate extraterritorially and how other states respond. When we do, we see that customary international law on jurisdiction to prescribe has remained stable in some ways and has changed in other ways.

International Law in the Early Twentieth Century

What did customary international law on jurisdiction to prescribe look like a century ago? In 1927, the Permanent Court of International Justice decided the Lotus Case. It distinguished jurisdiction to prescribe and jurisdiction to adjudicate from jurisdiction to enforce. The court noted that, although jurisdiction to enforce was strictly territorial, jurisdiction to prescribe and jurisdiction to adjudicate were not. The court held that Turkey had jurisdiction to prescribe law for a French citizen on board a French ship based on the effects of his conduct on a Turkish ship.

During the late 1920s, the faculty of Harvard Law School organized research projects on international law with the hope of codifying some of its rules. The results of the project on Jurisdiction with Respect to Crime were published in the American Journal of International Law in 1935. The Harvard Research identified five principles of jurisdiction to prescribe with respect to criminal law: (1) the territorial principle, which included an effects principle; (2) the nationality principle based on the nationality of the offender; (3) the passive personality principle based on the nationality of the victim; (4) the protective principle covering crimes against the security, territorial integrity, or independence of the state; (5) the universality principle, which was generally limited to piracy.

Today, customary international law on jurisdiction to prescribe is similar. As reflected in the 2018 Restatement (Fourth) of U.S. Foreign Relations Law, customary international law recognizes six bases for jurisdiction to prescribe: territory, effects, nationality, passive personality, the protective principle, and universal jurisdiction. Effects jurisdiction is listed separately from territorial jurisdiction because of its increased used and acceptance. And universal jurisdiction has expanded beyond piracy to cover human rights and terrorism.

The Restatement also says that these bases for jurisdiction to prescribe are reflections of a more basic principle of “genuine connection.” Section 407 states: “Customary international law permits exercises of prescriptive jurisdiction if there is a genuine connection between the subject of the regulation and the state seeking to regulate. The genuine connection usually rests on a specific connection between the state and the subject being regulated, such as territory, effects, active personality, passive personality, or protection. In the case of universal jurisdiction, the genuine connection rests on the universal concern of states in suppressing certain offenses.”

Effects Jurisdiction

I will briefly discuss the changes with effects jurisdiction and universal jurisdiction before turning to the principle of genuine connection. After World War II, the United States began to apply its antitrust law more aggressively to anticompetitive conduct outside the United States that caused harmful effects inside the United States. Although the Harvard Research recognized effects as a basis for jurisdiction to prescribe, its use with antitrust law was controversial because many European countries had policies encouraging cartels in some economic sectors. The disputes came to a head in the 1970s and 80s, when other countries filed formal protests and amicus briefs disputing effects jurisdiction and even enacted blocking statutes like the United Kingdom’s 1980 Protection of Trading Interests Act to block the enforcement of U.S. antitrust law.

But over time, other countries also adopted the effects principle with respect to their own competition laws. In 1988 the European Court of Justice held that EU competition law could be applied extraterritorially based on effects. And in 2008, China enacted its Anti-Monopoly Law, which “applies to monopolistic practices outside the mainland territory of the People’s Republic of China that eliminate or restrict competition in China’s domestic market.”

Universal Jurisdiction

Universal jurisdiction is the jurisdiction to prescribe law with respect to certain offenses of universal concern even if no specific connection exists between the state and the persons or conduct being regulated.

Universal jurisdiction grew significantly after World War II in the areas of human rights and terrorism. International human rights law developed after the Nuremberg and Tokyo war crimes tribunals. Beginning in 1980, the United States interpreted an old law called the Alien Tort Statute to allow victims of human rights violations abroad to bring suit for damages in U.S. courts. Since 2013, the U.S. Supreme Court has limited universal jurisdiction under the Alien Tort Statute by requiring a connection to the United States. But the United States still exercises universal jurisdiction with respect to torture and extrajudicial killing under the Torture Victim Protection Act (TVPA).

Universal jurisdiction also grew for terrorism. In this area, the development of the law came through treaties. In 1970, the Convention for the Suppression of Unlawful Seizure of Aircraft was concluded. This convention required state parties to extradite or prosecute offenders found in their territory. The obligation to prosecute even when there is no other connection to the crime is an obligation to exercise universal jurisdiction. Other suppression conventions followed for other acts of terrorism, and there were also a few suppression conventions involving human rights like the 1984 Convention Against Torture.

Universal jurisdiction authorized by treaties is not necessarily state practice that supports a rule of customary international law. But when states passed laws to criminalizing terrorist acts and torture, they did not limit those laws to other treaty-parties. To the extent the laws apply to terrorist acts and torture with respect to non-treaty parties, they are state practice supporting universal jurisdiction.

Genuine Connection

Another development has been to treat each of the specific bases for jurisdiction to prescribe as examples of a larger principle—the principle is that a state may regulate only if it has a genuine connection to the subject of the regulation. This idea goes back at least 30 years.

The principle of requiring a genuine connection can limit the extraterritorial application of law in some cases. In 2018, the CFO of Huawei, Meng Wanzhou was indicted in the United States for bank fraud, and the United States later sought her extradition from Canada. The indictment was based on a meeting Ms. Meng had in Hong Kong with non-U.S. banks. Although the United States might have claimed effects jurisdiction because the meeting caused U.S. banks to continue doing business with Huawei, in my view the connection to the United States was too weak to constitute a genuine connection. During the extradition proceeding, I filed an affidavit with the Canadian court saying that the U.S. prosecution violated international law.

Sanctions and Export Controls

The principle of genuine connection may also have some application to sanctions and export controls. U.S. sanctions on Iran have prohibited the export of goods and services from the United States to Iran. This is supported by the territorial principle. These sanctions also prohibit U.S. companies abroad and foreign companies controlled by U.S. companies from exporting goods and services to Iran. The prohibition on U.S. companies is supported by the nationality principle, but the prohibition on foreign companies controlled by U.S. companies is not. Customary international law generally attributes nationality based on the state of incorporation or principal place of business, not based on control. U.S. secondary sanctions that deny access to the U.S. market to foreign companies that sell goods or services to Iran are also supported by the territorial principle. International law does not require countries to provide access to their markets. But the sanctions that prohibit foreign banks from processing payments involving Iran because most dollar transactions are cleared through New York probably goes too far. Although there is technically a territorial connection with the United States, this does not, in my view, establish a genuine connection when both the parties are foreign and the transaction does not otherwise touch the United States.

The new U.S. export controls on advanced computer and semiconductor exports to China also raise questions under the international law of prescriptive jurisdiction. These rules, published on October 7, prohibit the export from the United States to China of certain semiconductors and equipment for making semiconductors. This is supported by the territorial principle. These rules also prohibit U.S. persons from providing support to certain semiconductor manufacturing in China. This is supported by the nationality principle. Finally, these rules prohibit the export to China of goods made outside the United States using U.S. origin technology. None of the traditional bases for prescriptive jurisdiction support this rule. But if the fundamental rule for prescriptive jurisdiction is that a state must have a genuine connection, then the question we must ask is whether the U.S. origin of technology creates such a genuine connection.

This is an open question. So far as I know, the United States is the only country that regulates extraterritorially based on the origin of technology. But it remains to be seen how many states will protest this exercise of jurisdiction. In the 1980s, by comparison, many countries protested U.S. attempts to regulate the exports of foreign companies that were controlled by U.S. companies.

International Law Evolves

The customary international law of prescriptive jurisdiction will continue to evolve in the 21st century. Nations will continue to apply their laws extraterritorially on some established bases of jurisdiction like territory, effects, and nationality. But they may also assert jurisdiction to prescribe based on new connections like the origin of technology. The development of customary international law depends not only on whether nations exercise jurisdiction on new bases but also on how other nations react to such exercises of jurisdiction. Will they object, or will they acquiesce without protest? Only time will tell.

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New Paper on Forum Selection Clauses https://tlblog.org/new-paper-on-forum-selection-clauses/?utm_source=rss&utm_medium=rss&utm_campaign=new-paper-on-forum-selection-clauses Tue, 29 Nov 2022 13:00:44 +0000 https://tlblog.org/?p=3330 Over the past three years, I have spent a lot of time trying to get a sense for when U.S. courts will and will not enforce forum selection clauses. Working with Katie Richardson — first as a law student, then as an associate at McGuire Woods, and finally as a clerk on the D.C. Circuit — we read hundreds and hundreds of state cases where the issue of enforceability was presented to a state court. Two papers grew out of this research. The first, Enforcing Inbound Forum Selection Clauses in State Court, provides a thorough account of when state courts will enforce forum selection clauses that choose the courts of the state where the suit was filed. The second, Enforcing Outbound Forum Selection Clauses in State Court, provides an equally thorough account of when state courts will enforce forum selection clauses that choose a court in another state.

Having obtained a good sense for how state courts deal with these provisions, I then turned my attention to the federal courts. I spent many, many hours in the spring, summer, and fall of 2021 reading every federal case uploaded to LexisNexis between 2014 and 2020 where a federal court addressed the issue of whether an outbound forum selection clause was enforceable. I then wrote a paper which surveyed federal practice in this area through the lens of the U.S. Supreme Court’s decision in Atlantic Marine. That paper, Contractually Valid” Forum Selection Clauses, was published last week in the Iowa Law Review. Here is the abstract:

In Atlantic Marine Construction Company v. United States District Court, the Supreme Court held that a “contractually valid” forum selection clause should be enforced by federal courts absent extraordinary circumstances. Unfortunately, the Court provided no guidance on how to assess whether a clause is “contractually valid.” This Article fills the gap. It argues that the answer to this question turns on three separate inquiries. First, a court should determine whether the forum selection clause is valid. Second, the court should interpret the forum selection clause to determine whether it is exclusive and applies to the claims asserted. Third, the court should evaluate whether the forum selection clause is enforceable. Until each of these inquiries is complete, it is impossible to know whether a clause is “contractually valid” as that term is used in Atlantic Marine.

The third inquiry—relating to enforceability—is arguably the most complex. In an attempt to demystify it, the Article draws upon an original, hand-collected dataset of 658 federal cases decided after Atlantic Marine to evaluate how the federal courts resolve cases where one party challenges the enforceability of a forum selection clause. The cases in this dataset show that forum selection clauses are enforced roughly eighty-eight percent of the time. They also show that federal courts are reluctant to strike down forum selection clauses for being unreasonable. This reluctance, combined with other doctrinal innovations that favor the enforcement of these clauses, means that the current legal regime overwhelmingly and unduly favors the large corporations that write forum selection clauses into their agreements with customers and employees. In an attempt to address this imbalance, the Article urges the lower federal courts to adopt a number of specific reforms—none of which requires intervention by Congress or the Supreme Court—that would help to level the playing field.

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CISG Opt-Outs and Ascertaining Party Intent: A Back-to-Basics Perspective https://tlblog.org/cisg-opt-outs-and-ascertaining-party-intent-a-back-to-basics-perspective/?utm_source=rss&utm_medium=rss&utm_campaign=cisg-opt-outs-and-ascertaining-party-intent-a-back-to-basics-perspective Mon, 28 Nov 2022 13:00:48 +0000 https://tlblog.org/?p=3307 Two of this year’s contributions to Transnational Litigation Blog have addressed the intellectually stimulating but also practically pressing issue of identifying when, and how, commercial parties can exclude the United Nations Convention on Contracts for the International Sale of Goods from their international sales agreements.

In Professor John Coyle’s CISG Opt-Outs and Party Intent, Professor Coyle argues that real-world contract drafters in the United States do not understand that choosing “the laws of the State of New York,” for example, includes the CISG.  For this reason, Professor Coyle advocates statutory intervention clarifying that “generic choice-of-law clauses [in favor of the laws of US states] exclude the CISG.”  In response, Professor Ronald A Brand and Professor Harry Flechtner’s Rewarding Ignorance of the CISG: A Response to John Coyle emphasizes that the expectations of U.S. contract drafters represent only half of the contractual negotiation equation. They also argue that “abject ignorance of the law” on behalf of those contract drafters “is not something to be encouraged.”

In this post, we offer a response to both perspectives.  Our insights are grounded in a back-to-basics approach to contractual interpretation.  They also draw upon analogous issues arising under a previously problematic (and now repealed) section of Australia’s international commercial arbitration laws.

Back-to-Basics: Choice-of-Law Clauses, Their Interpretation, and the CISG

Professors Brand and Flechtner’s observation that U.S. contract drafters are only one half of the contractual negotiation equation is an important component of a back-to-basics approach to the issue of contractual interpretation.

The CISG is a default international sales law.  If its application criteria are satisfied, it automatically applies, unless excluded by the parties.  As Professor Coyle correctly notes, this occurs via the mechanism of Article 6: “[t]he parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.”  The reference to Article 12 here, concerning written form requirements, is irrelevant for present purposes.

However, as Professors Brand and Flechtner also correctly note, the CISG’s default status means that “the CISG must apply to the interpretation of the [choice of law] clause” (emphasis in original).  What this means, as a matter of law, over and above the detail provided in Professors Brand and Flechtner’s post, is answered via a careful understanding of Article 8 of the CISG: the treaty’s rules for contractual interpretation.

Professor Coyle’s argument, supported by his empirical study, is based upon the subjective understandings of contract drafters sitting on the U.S. side.  Article 8, however, allows recourse to subjective and objective intent in different – and carefully defined – circumstances.  Pursuant to Article 8(1), when interpreting “statements made by and other conduct of a party” (which includes proffering contractual terms), interpretation occurs “according to [a party’s] intent when the other party knew or could not have been unaware what that intent was.”  Though subjective intent is the primary – that is, first in line – rule, this requirement presents a high bar, meaning that Article 8(2)’s objective intent rule applies instead in most cases.

Would an international (i.e. non-U.S.) contracting counterparty understand, without more, a U.S. party’s subjective intent that “the laws of the State of New York” (or other cognate clause) excludes the CISG?  To the extent that this represents American exceptionalism, as argued by Professors Brand and Flechtner, arguably not.  As Professor Dr. Ingeborg Schwenzer – the world’s leading international sales law authority – points out, there are many good reasons why commercial parties might choose the CISG over an unconnected third State’s law.  The list of reasons includes its comparative accessibility when a third State’s law (and commentaries) require translation, its ability to eliminate the need to hire legal experts from third states, and its potential superiority in addressing “central questions of contract law” that might not have been addressed by local law.  These reasons may also resonate with non-U.S. parties who may then, as a result, understandably consider that a reference to New York law (without more) includes the CISG.

Resort to the objective intent rule in Article 8(2) confirms that a choice of “the laws of the State of New York” likely includes the CISG, at least under the current state of the law.  To adapt the words of Professors Brand and Flechtner, it is hard to justify as reasonable (for the purpose of Article 8(2)) the view that “a choice of the law of state X should not include rules that clearly are the law of state X.”  Even Australian CISG case law, which has been unfortunately consistently parochial when it comes to the Convention’s interpretation, accepts that Victorian law includes the CISG, Victoria being an internal Australian state, just as New York is an internal jurisdiction of the United States of America.

For these reasons, case law reading a choice of New York law as including the CISG is not just “entirely sensible” for practical or policy reasons.  Such cases reflect a legally correct application of the CISG’s contractual interpretation rules: the rules that necessarily determine whether or not the CISG has been displaced.  The correctness of this interpretative approach is recognized around the world: contrary reasoning, including one instance involving an arbitral tribunal reading a choice of Italian law as excluding the CISG, is routinely criticized.

Australian Arbitration Law: A Cautionary Tale

Our back-to-basics analysis discloses that the problem at the core of Professor Coyle’s recommendation is the fact that some U.S. lawyers subjectively think that the law is different to what it actually is.  A cautionary tale, arising out of a now-repealed section of Australia’s international commercial arbitration laws, is instructive here.  Given their respective international origins and trade facilitation purposes, international sales law and international commercial arbitration law have much to learn from each other.

The issue previously arising under Australia’s international commercial arbitration laws also involved excluding a body of law by contract.  There, the relevant body of the law was the procedural-in-nature UNCITRAL Model Law on International Commercial Arbitration.

According to the former International Arbitration Act 1974 (Cth) section 21:

If the parties to an arbitration agreement have (whether in the agreement or in any other document in writing) agreed that any dispute that has arisen or may arise between them is to be settled otherwise than in accordance with the Model Law, the Model Law does not apply in relation to the settlement of that dispute.

Initially, Queensland’s Eisenwerk decision took a position at odds with the internationally understood difference between arbitral laws and contractual arbitration rules.  It held that adopting the International Chamber of Commerce (‘ICC’) arbitration rules operated to opt out of the Model Law.  This was despite Articles 2(e) & 19(1) Model Law specifically providing for party choice of arbitration rules.  The practical effect of Eisenwerk was to subject similar arbitration agreements to Australia’s domestic commercial arbitration acts which were (at the time) not based upon international standards.  This left the consistency of Australia’s arbitration regime with international expectations in a state of flux.  Somewhat surprisingly, given the jurisdiction’s reputation for arbitration excellence, Eisenwerk influenced Singapore’s approach to its own section 21 equivalent, though this position was quickly legislatively reversed in that jurisdiction.

Legislative attention to this problem took much longer in Australia.  The original section 21, however, was reconsidered in New South Wales in 2010, with Eisenwerk’s opt-out analysis being considered wrong and thereby not followed.  However, as the so-called Eisenwerk principle itself was grounded in contractual interpretation, the Court also addressed whether the very existence of the Eisenwerk authority was relevant to the parties’ objective intentions when adopting the ICC arbitration rules.  On that point, the Court emphasized that the slightly different wording in the arbitration clause under examination compelled a different conclusion, despite the existence of Eisenwerk as a legal authority at the time of contracting.  The jurisdictionally peculiar Eisenwerk precedent was confined to its facts, so as to give internationally accepted understandings of the Model Law their maximum possible effect.  More recent Australian High Court authority has emphasized the importance of context in construing arbitration agreements: for present purposes, considering the international context of choice of law clauses is equally important in determining whether they exclude the CISG.

Eisenwerk, like Professor Coyle’s proposed choice of law reform, was a jurisdictional peculiarity considered out-of-step with international expectations.  For that reason, it was rightly criticized, “as it limited the certainty that parties could have” regarding their governing procedural regime.  U.S. legislative intervention clarifying that choosing state law excludes the CISG would arguably have the same effect, so far as U.S. merchants’ international counterparties are concerned.

Suggested Perspectives: Advancing the Debate from Here

At the outset of this post, we described the issues under examination as intellectually stimulating, but also practically pressing.  It is worth remembering here that they are relevant outside of formal dispute resolution, too.  Determining a choice of law clause’s meaning – including whether or not it encompasses or excludes the CISG – may affect outcomes in litigation and in arbitral proceedings.  But it also stands affect contract performance, and settlement prospects: particularly in the small-to-medium enterprise context, where the CISG has special utility as a tool to assist informal dispute resolution.

This broader context is a reminder that whilst the CISG is fertile ground for technical legal analysis, it is ultimately intended to be a tool for business and the promotion of international trade.  At the same time, the CISG’s contribution “to introducing certainty in commercial exchanges and decreasing transaction costs” requires it be properly understood and properly applied as law.  This includes, at a back-to-basics level, its contract formation rules, which apply to choice of law clauses purportedly excluding the CISG.  This also includes understanding that the CISG’s application mechanisms – binding on Contracting States as a matter of public international law – aren’t susceptible to adjustment by Contracting States.  This is more so the case when proposed adjustments advance the interests (objectively legitimate or not) of practitioners from one particular legal system.

Does this necessitate resort to the tried-and-tested placement of blame on contract drafters?  Not necessarily.  The objection against “having to learn more law” is a strong motivator against State adoption of the CISG in the United Kingdom context.  In any event, the empirically confirmed phenomenon of U.S. parties opting-out of the CISG when it would not apply in any event seems to sit in tension with Professor Coyle’s other findings as to U.S. lawyers’ ignorance of the CISG.  Perhaps the better view is to see this matter as requiring enhanced student CISG education – identified by Professor Schwenzer as lacking in many jurisdictions – and greater student education around private international law as a whole.  Despite private international law’s importance to contemporary legal practice, it is not routinely studied in our own jurisdiction (Australia).  CISG education undertaken in isolation, separated from the consideration of broader choice of law rules, arguably only goes part-way to solving the “disconnect” identified by Professor Coyle.  A more holistic understanding of the choice of law process might help future practitioners understand that where opt-outs are genuinely desirable, an express opt-out clause is always preferable” to avoid the problems this series of blog posts has addressed.

On that disconnect, given that “The View from the Bench” is consistent with back-to-basics interpretative principles, it is preferable that any adjustment occurs on the practitioners’ side.  Article 6 is actually one reason for the CISG’s success.  Its result is that “nothing has to change if you don’t want it to change because you can insist on excluding the CISG.”  Still, there must be a legally effective insistence on such exclusion, in accordance with this post’s analysis.  What represents a problem now may in truth be a great opportunity to internatonalize law school curricula in an increasingly international business world.

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HAPPY THANKSGIVING https://tlblog.org/happy-thanksgiving/?utm_source=rss&utm_medium=rss&utm_campaign=happy-thanksgiving Wed, 23 Nov 2022 14:10:26 +0000 https://tlblog.org/?p=3313 We hope that our readers near and far have a great Thanksgiving — or a wonderful weekend, if you do not celebrate the holiday.  We are thankful for our audience and we invite your comments and suggestions about TLB. Contact us at: Ingrid.wuerth@vanderbilt.edu.

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The PDVSA Bonds, Autocracy, and the Venezuelan Constitution https://tlblog.org/the-pdvsa-bonds-autocracy-and-the-venezuelan-constitution/?utm_source=rss&utm_medium=rss&utm_campaign=the-pdvsa-bonds-autocracy-and-the-venezuelan-constitution Tue, 22 Nov 2022 13:00:19 +0000 https://tlblog.org/?p=3297 The Second Circuit’s recent decision in Petróleos de Venezuela S.A. v. MUFG Union Bank, N.A. certified a number of choice-of-law questions to the New York Court of Appeals. The decision to certify, which had the effect of postponing a definitive resolution of the dispute, was previously discussed at TLB here and here.

In this post, I focus on the Venezuelan constitutional background to the dispute. In doing so, I draw both on my own prior work and on an amicus brief that was filed on behalf of four comparative constitutional scholars, including myself. The other scholars involved in the amicus were Diego Zambrano (Stanford), Mila Versteeg (Virginia), and Nelson Camilo Sanchez Leon (Virginia).

Abusive Constitutionalism and the Suppression of the Congress in Venezuela

The erosion of democracy in Venezuela has been well documented. An important feature of this erosion – one seen too in other instances of authoritarianism around the world – is the heavy reliance on legal tools, including use of constitutional law. After winning office, Hugo Chavez oversaw a constitutional replacement in 1999 that consolidated power in the hands of the executive and marginalized the opposition. Later, Chavez eliminated presidential term limits via a second attempt at a referendum, after a first attempt narrowly failed. This allowed Chavez to remain in power until his death in 2013.

The instrumental use of constitutional law has also been a part of the increasing repression seen under Chavez’s successor, Nicolas Maduro. Most relevantly for our purposes, dubious uses of the constitution became a key tool to suppress the opposition-held legislature. In late 2015, in a context of deep economic crisis, a well-organized opposition won an overwhelming victory in the unicameral National Assembly, despite Maduro’s attempts to tilt the electoral playing field heavily in his favor. A few seats in outlying regions of the country were disputed, and at stake was whether the opposition would have a two-thirds supermajority able to amend the constitution. The Electoral Chamber of the Supreme Court, which had been completely packed by the regime, issued decisions in those seats ordering the Assembly to seat the pro-regime legislators. When the Assembly did not, the Supreme Court began holding it in contempt.

Thus began an extraordinary multi-year campaign where the Maduro regime relied on the Supreme Court to suppress essentially all of the Assembly’s powers. In some cases, as when it invalidated a political amnesty law, the Court simply relied on highly dubious uses of constitutional doctrine and international human rights law. But in many other cases, it cited the contempt order as a way to nullify the Assembly’s actions. In addition, it transferred key powers that are constitutionally reserved to the Assembly, such as the power to promulgate the budget, to Maduro, who exercised them unilaterally. The logical culmination of these decisions was a 2017 decision that took away all of the Assembly’s powers while the order of contempt persisted, and held that in order to avoid a “legislative omission,” the Court itself could exercise all legislative powers, or transfer them to the institution of its choosing (i.e. President Maduro). The Court partially backed off some parts of its decision (such as stripping parliamentary immunity) after even some Maduro loyalists balked, but its core logic remained intact. Internationally, some countries, including the United States, sanctioned the justices directly following this decision.

In mid-2017, the regime changed tactics even as it continued to suppress the Congress. Using a dubious read of the constitutional text, Maduro called elections for a National Constituent Assembly unilaterally, without holding a prior referendum, and then appeared to alter the vote totals for his (unopposed) candidates in order to create an image of greater popular support and legitimacy. The new Constituent Assembly was a kind of farcical version of Chavez’s 1999 constitution-making body. During its more than three-year life, it never bothered to write a new constitution or even to enact any constitutional changes. Instead, it viewed its main function as using the doctrine of “original constituent power” – its supposed powers as the embodiment of “the people” – to take over legislative powers. The new Constituent Assembly removed public officials, called new elections for a series of posts (including the presidency, which allowed Maduro to win another term), and passed a sweeping series of laws via “decree.”

Article 150 and Attacks on Legislative Power

This background is relevant because the 2016 PDVSA bond swap occurred during this period, after the opposition had won a solid majority of the Assembly, and while the Supreme Court was taking a series of steps to nullify its powers.

Article 150 of the Venezuelan constitution requires that contracts in the “national public interest” be approved by the National Assembly before going into effect, as established by law. Similarly, Article 187 gives the Assembly power to “authorize the National Executive to enter into contracts in the national interest.”

In our amicus brief, we point out that these clauses are reasonably common comparatively, both regionally and globally, and in some cases follow episodes where there is significant concern about authoritarianism or democratic erosion. We also note that these provisions are related to the concept of legal reserve, or the idea that certain sensitive issues should only be regulated after legislative approval.

The Maduro administration’s indifference towards these constitutional provisions, and decision to move forward despite a legislative resolution disapproving of the bond swap, is not surprising in light of the context noted above. It was not an accident or a legitimate dispute about the separation of powers, but rather part of a coordinated (and successful) campaign to suppress congressional power, and to transfer that power to Maduro. Moreover, that dynamic would have been clear to outside observers.

Implications

The implications of these points for the litigation (and, politically, for the balance of power between the regime and opposition) are complex. As the Second Circuit panel recognizes, the relevance of the Venezuelan constitutional issues are modulated in unpredictable ways by the interaction between New York choice-of-law rules and the federal act of state doctrine. The Second Circuit opinion suggests, without deciding, that there are good arguments for applying Venezuelan constitutional law to determine the validity of the bonds at issue, either via the N.Y. U.C.C. or via a common law public policy exception. We will see, of course, what the New York Court of Appeals ultimately decides on these questions.

Depending on what the Court of Appeals decides, the case could become an example of what Dixon and Jackson have called “extraterritorial constitutional interpretation.” Constitutional interpretation by outsiders, such as foreign courts or international organizations, is increasingly common, but it raises problems of competence and legitimacy. This is a particularly thorny issue in cases like this one, where domestic legal institutions like the Venezuelan Supreme Court cannot be trusted for unbiased interpretation. The interpretation of “national public interest” contract, for example, is not obvious, although it would seem to me that it would have to include the 2016 PDVSA bond swap if the term is to have any meaning.

Liberal democratic states can sometimes play at least a modest role in preventing and responding to what Dixon and I have called “abusive” uses of constitutional law like those that pervade the Venezuelan regime.  And thus, as we stated in the amicus brief, it would seem both reasonable and consistent with U.S. values for the New York Court of Appeals to give effect to the important policies found in Article 150 of the Venezuelan Constitution.

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Zombie Choice-of-Law Clauses https://tlblog.org/zombie-choice-of-law-clauses/?utm_source=rss&utm_medium=rss&utm_campaign=zombie-choice-of-law-clauses Mon, 21 Nov 2022 13:00:27 +0000 https://tlblog.org/?p=3252 When a contract is terminated, the provisions contained in that agreement generally cease to have any legal effect. Many U.S. courts have held, however, that contract provisions relating to dispute resolution continue to bind the parties even after the underlying contract ceases to be. In this post, I refer to such provisions as “zombie” clauses because they endure even after the main agreement ends. This post examines some of the legal issues presented by zombie choice-of-law clauses, in particular, and their relationship to the legal doctrine of separability.

Wahl Clipper Corp. v. Plaza Lama

To illustrate how zombie clauses come to be, it is helpful to examine the facts of a recent case decided by the Northern District of Illinois – Wahl Clipper Corp. c. Plaza Lama, S.A. Wahl Clipper Corporation (“Wahl”) is an Illinois-based company that sells hair clippers, hair trimmers, and shavers. Plaza Lama, S.A., (“Plaza”) is a company that operates department stores in the Dominican Republic. In January 1997, Wahl entered a Distributor Agreement (the “Agreement”) with Plaza whereby Plaza agreed to become the exclusive distributor of Wahl’s products in the Dominican Republic. The agreement contained a choice-of-law clause selecting the laws of Illinois and a non-exclusive forum selection clause selecting the courts in Illinois. The Agreement stated that it would automatically expire on December 31, 1997, unless the parties agreed in writing to renew it. The parties never renewed the agreement.

Over the next twenty-four years, Wahl continued to sell hair-trimming products to Plaza. It did so, however, on a non-exclusive, purchase-order/confirmation basis. None of these purchase orders contained choice-of-law clauses. In 2021, Plaza contacted Wahl to demand that it perform certain actions required under the Agreement. It also threatened to sue Wahl for damages in the Dominican Republic under a local statute that allows foreign companies to terminate distribution agreements with local companies only for “just cause.” In response, Wahl filed a declaratory judgment action in the Northern District of Illinois asking the court to find (1) that the Agreement expired in 1997, and (2) that the Dominican statute did not apply to the relationship between Wahl and Plaza. Although Plaza was properly served, it failed to answer or otherwise respond to the complaint. The district court entered a default judgment against Plaza on November 7, 2022.

Separability and Zombie Clauses

In its decision, the district court sought to determine whether the Illinois choice-of-law clause in the Agreement was enforceable against Plaza under Section 187 of the Restatement (Second) of Conflict of Laws. It held that the clause was enforceable, first, because the interest of the Dominican Republic in applying its law to the dispute was not materially greater than that of Illinois and, second, because applying Illinois law would not be contrary to a fundamental policy of the Dominican Republic. Although the court’s decision assumes that the Illinois choice-of-law clause was still in effect, the court never explained why this would be so since the Agreement had expired by its terms in 1997.  Although contracts sometimes specify that certain provisions will survive after termination, the Agreement does not appear to contain a survival clause.

The legal concept of separability offers a potential explanation for the court’s decision. If one conceives of the choice-of-law clause as a separate, stand-alone agreement between the parties that is embedded in the main agreement, then the termination of the main contract should have no effect on the clause. The Supreme Court has long held, for example, that arbitration clauses are “separable” from contracts into which they are embedded. If a party seeks to invalidate an arbitration clause on the basis of fraud, it is not enough to show that the contract as a whole was induced by fraud. The resisting party must show that the arbitration clause was itself induced by fraud.  The logic of separability has led a number of U.S. courts to conclude that arbitration clauses generally survive the termination of the contracts in which they are embedded. Because these clauses have an separate existence, so the argument goes, they continue to have legal effect even after the underlying agreement is terminated.

Some U.S. courts have applied this same logic to cases involving forum selection clauses. Since forum selection clauses constitute separate agreements between the parties, the courts reason, they may only be invalidated on the basis of fraud when the fraud relates specifically to the clause. This line of cases has attracted criticism. The  practical consequences of applying the doctrine of separability to forum selection clauses is that these provisions (1) are almost always deemed valid, and (2) continue to exist until the end of time. There are situations — including but not limited to cases involving contracts of adhesion between large corporations and individual consumers — where it may be unfair to grant this supercharged status to forum selection clauses.

One can apply the same logic of separability to choice-of-law clauses. If the choice-of-law clause is separable, it should continue to have legal effect even after the main agreement is terminated. On this account, the choice-of-law clause is not a “zombie” raised from the corpse of a dead contract. It had an independent existence from the very beginning. The Hague Principles on Choice of Law in International Commercial Contracts takes the position that choice-of-law clauses are separable from the main agreement in commercial contracts. Article 7.2 states that a choice-of-law agreement “possesses an autonomous character from the contract to which it applies.” Article 7.3 states that a “choice of law agreement is not affected by a claim that the main contract is invalid, non-existent or ineffective.” If the doctrine of separability is applied in the Wahl case, the district court’s decision enforcing the choice-of-law clause may be justified on the grounds that that clause was distinct and separate from the main agreement.

Party Intent and Public Policy

As noted above, it is common for sophisticated parties to draft agreements that contain survival clauses. These clauses specify that some (but not all) of the provisions in the contract shall survive the termination of the agreement. If a contract omits a survival clause, or if a choice-of-law clause is not specifically mentioned in a survival clause, then the court must decide whether the parties intended the clause to lapse upon termination of the underlying agreement.

Very few courts have considered whether it is appropriate to apply the doctrine of separability to choice-of-law clauses. The general sense among scholars to have written on this issue, however, is that parties generally want their choice-of-law clauses to endure beyond the termination of the contract. This approach probably reflects majoritarian preferences in the general run of cases. There are circumstances, however, where one may reasonably wonder whether the parties truly intended to have their choice-of-law clause live on forever. One might ask, for example, whether Plaza really intended for the Illinois choice-of-law clause in the Agreement to bind it even after it had entered into dozens of subsequent purchase orders that lacked any choice-of-law clause. It is also debatable whether most parties would want a very broad choice-of-law clause — one which governs any disputes arising out of the “relationship” between the parties — to supply the governing law for all future disputes between the parties… including those disputes that have absolutely no connection to the original contract. And where a contract contains a survival clause that omits any mention of the choice-of-law clause, it is fair to ask whether the parties really intended their choice-of-law clause to survive past the end of the agreement. If the parties intended this result, why didn’t they say so in their survival clause? While applying the doctrine of separability to choice-of-law clauses may be sensible as a general rule, in summary, there are scenarios where the parties may have intended a different result.

In the context of non-negotiated contracts of adhesion with consumers and employees, the courts should also carefully consider whether extending the life of the choice-of-law clause represents sound public policy. In such cases, the company drafting the contract had the unfettered ability to write a survival clause into the agreement prolonging the life of the choice-of-law clause beyond the end of the contract. If the company failed to do so, then the doctrine of contra proferentem suggests that this absence should be construed against the drafter.

Conclusion

In a perfect world, the parties would always write language into their agreement specifying which clauses will survive termination of the contract. Such language makes the court’s job easy. When a contract lacks any language to this effect, then the general rule is that dispute resolution clauses survive the termination of the agreement. There are situations, however, where this outcome may not align with notions of party intent and sound public policy. In cases where the parties have entered into subsequent agreements on the same topic that omit any choice-of-law clause, for example, or where the clause is exceptionally broad, or where the survival clause makes no mention of the choice-of-law clause, the courts should think long and hard before deciding to zombify a choice-of-law clause and grant it eternal life.

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State Department Recognizes Head-of-State Immunity for MBS https://tlblog.org/state-department-recognizes-head-of-state-immunity-for-mbs/?utm_source=rss&utm_medium=rss&utm_campaign=state-department-recognizes-head-of-state-immunity-for-mbs Fri, 18 Nov 2022 04:50:04 +0000 https://tlblog.org/?p=3282 Earlier today, the U.S. State Department recognized that Crown Prince Muhammad bin Salman (MBS) is entitled to head-of-state immunity as Prime Minister of Saudi Arabia in a case brought by Democracy in the Arab World Now (DAWN) and the widow of journalist Jamal Khashoggi, who was brutally murdered by Saudi security agents at the Saudi embassy in Istanbul.

Background

Khashoggi’s widow, Hatice Cengiz, and DAWN, a U.S. organization that he helped found, sued MBS and 28 other defendants in federal court in the District of Columbia. Khashoggi married Cengiz in a religious ceremony in Istanbul. To confirm the marriage civilly, he needed a certificate from Saudi Arabia, which he tried and failed to obtain from the Saudi embassy in Washington, D.C. The complaint alleges that MBS instructed embassy employees to entrap Khashoggi by representing that he could obtain the required certificate only in Istanbul and that it would be safe to do so. Khashoggi went to the Istanbul consulate to obtain the certificate and was killed, allegedly on the orders of MBS.

Head-of-State Immunity

Head-of-state immunity is a form of foreign official immunity based on the status of certain foreign officials. It grants absolute immunity from suit to foreign heads of state, heads of government, and foreign ministers during their terms in office. It is distinct from conduct-based immunity, applicable to lower-level officials and to former officials, which grants immunity only with respect to acts taken in an official capacity. Head-of-state immunity is required by customary international law, and has long been recognized in federal common law.

Initially, MBS claimed head-of-state immunity as a member of King Salman’s family and based on his own high-ranking position in the Saudi government. (He did not claim conduct-based immunity, presumably because he could not argue that Khashoggi’s murder was an official act.) As I noted in August, U.S. practice and international law have consistently limited head-of-state immunity to heads of state, heads of government, and foreign ministers. MBS held none of these positions. It would have been a remarkable break from practice for the United States to have suggested immunity for MBS under those circumstances.

All this changed on September 27, when King Salman named MBS Prime Minister of Saudi Arabia, just days before the United States was due to express its views on MBS’s claim to immunity. The United States sought and was granted an extension of the time to express its views until November 17, but the answer was in little doubt. As I wrote then, MBS’s status as Prime Minister entitles him to head-of-state immunity as Saudi Arabia’s head of government.

The State Department’s Determination

That is precisely what the State Department decided today. In a letter to the Justice Department, Acting State Department Legal Adviser Richard Visek wrote that “[t]he State Department recognizes and allows the immunity of Prime Minister Mohammed bin Salman as a sitting head of government of a foreign state.” The letter follows the State Department’s standard form, relying on “common law principles of immunity articulated by the Executive Branch in the exercise of its Constitutional authority over foreign affairs and informed by customary international law.” (Chimène Keitner and I have criticized the executive’s claim of constitutional authority to make federal common law rules governing immunity, as has Ingrid (Wuerth) Brunk.) The letter also reiterated the State Department’s “unequivocal condemnation of the heinous murder of Jamal Khashoggi.”

This letter was accompanied by a statement of interest filed by the Justice Department. This statement also follows the standard format for such filings. It asserts the President’s broad authority “to represent the nation in the conduct of foreign relations.” It notes that “[t]he doctrine of head of state immunity is well established in customary international law.” And it notes that “[c]ourts routinely defer to the Executive Branch’s immunity determinations concerning sitting heads of state and heads of government.”

Assessment

After the filing, DAWN released a statement quoting its executive director as saying: “It’s impossible to read the Biden administration’s move today as anything more than a capitulation to Saudi pressure tactics, including slashing oil output to twist our arms to recognize MBS’s fake immunity ploy.”

Although I agree that MBS’s appointment as Prime Minister was likely made to guaranty him head-of-state immunity, I disagree that the State Department’s filing constitutes a capitulation to Saudi pressure tactics. As Saudi Arabia’s head of government, MBS is entitled to head-of-state immunity as a matter of international law. Longstanding and consistent U.S. practice also supports the grant of immunity in this case. It would have been just as remarkable for the United States to deny MBS’s head-of-state immunity after his appointment as Prime Minister as it would have been for the United States to recognize MBS’s head-of-state immunity before his appointment.

What makes this case shocking is the brutality of the crime that immunity shields from suit. But head-of-state immunity is an absolute immunity with no exceptions for egregious violations of human rights. As a legal matter, there is nothing shocking about the State Department’s conclusion.

The State Department’s determination should end the suit against MBS. The executive’s recognition of an official as head of government is not subject to review by a court, and head-of-state immunity follows as a matter of course from that status under customary international law and federal common law.

There are, however, 28 other defendants in the suit brought by DAWN and Khashoggi’s widow, none of whom is entitled to immunity. Two of them have appeared and moved to dismiss on various grounds, including the act of state doctrine and failure to join Saudi Arabia as an indispensable party. As I explained in an earlier post, these defenses are extremely weak, and the U.S. statement of interest expresses no view on them. If claims are dismissed against some or all of the other defendants, it will likely be for lack of personal jurisdiction.

Conclusion

The murder of Jamal Khashoggi was a heinous crime, and there is little doubt in the eyes of the world that MBS bears direct responsibility. The claims against other defendants, not entitled to immunity, may result in further discovery that sheds more light on MBS’s involvement. But MBS’s appointment as Prime Minister effectively shields him from suit in U.S. courts as a matter of international law. This is not a result to celebrate. But it is the law, nonetheless.

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