Worldwide: Recent Decision On Sovereign Immunity Highlights Need For Advance Planning When Transacting With Foreign Sovereign Entities

Last Updated: December 23 2015
Article by Charles T. Kotuby Jr., Melissa Stear Gorsline and Baiju S. Vasani

On December 1, 2015, the United States Supreme Court issued its decision in OBB Personenverkehr AG v. Sachs,1 which presented a seemingly simple question: When do commercial activities in the United States strip foreign states and state-owned entities of sovereign immunity and subject them to jurisdiction in U.S. courts? The answer, according to the Court, is that they are subject to U.S. jurisdiction only when the plaintiff's claim is "based upon" commercial activity in the United States. This decision reversed an en banc decision of the U.S. Court of Appeals for the Ninth Circuit and made it more difficult to sue foreign sovereigns and state-owned entities in U.S. courts. This was less of a jurisprudential revolution than a simple reminder that when U.S. individuals and companies transact business with foreign sovereigns, proactive negotiation of arbitration clauses, forum selection clauses, or investment treaty planning is a paramount element of risk mitigation.

Commercial Activity and Foreign Sovereigns: A Primer

For more than half a century, U.S. law has reflected a policy of "restrictive sovereign immunity," which provides immunity to foreign states for claims arising out of governmental acts but denies the same immunity for claims arising out of commercial activities. And since 1976, sovereign immunity in the United States has been implemented through the Foreign Sovereign Immunities Act ("FSIA"), which reflects this policy of restrictive immunity in section 1605. That provision subjects foreign states to U.S. jurisdiction in connection with any case:

in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.2

This provision sets forth a number of bases to find an adequate nexus to the United States for jurisdiction to attach. But general language like "in connection with" and "direct effect" has given rise to significant litigation and jurisprudence as states have increasingly entered the marketplace, breached their contracts, and committed commercial torts.

OBB Personenverkehr AG v. Sachs

This case focused on a different open-ended phrase in the statute: when a claim is "based upon" a commercial activity.

Sachs involved tort claims brought by an American tourist who was seriously injured while boarding a train in Austria. The train was operated by OBB Personenverkehr AG, an Austrian state-owned railway and member of the Eurail Group. Sachs was traveling on a Eurail pass, which she had purchased online from Rail Pass Experts ("RPE"), a travel agent located in Massachusetts.

Sachs filed suit against OBB and other parties in the U.S. District Court for the Northern District of California. Unsurprisingly, OBB asserted sovereign immunity, and the district court dismissed the case on that basis, finding that there was insufficient evidence to find that RPE was OBB's agent such that RPE's sale of the Eurail pass could be imputed to OBB for purposes of establishing jurisdiction under the commercial activity exception of the FSIA. On appeal, a divided panel of the Ninth Circuit affirmed, but the case then went en banc.

The en banc Court of Appeals held that RPE's sale of the Eurail pass was imputable to OBB under traditional agency doctrine. Thus, OBB had engaged in "commercial activity" in the United States under the FSIA. The court of appeals then considered the question of whether the plaintiff's claims were "based upon" that commercial activity—i.e., whether there was an adequate nexus between Sachs's purchase of the Eurail pass in the United States and her claims. The court said that there was; Sachs's purchase of the pass established a passenger-carrier relationship with OBB, a necessary element of her negligence claim, and further provided the basis for the warranties that Sachs claimed OBB breached.

The Supreme Court reversed in a unanimous opinion by Chief Justice Roberts. The Court's analysis focused primarily upon whether Ms. Sachs's claims were "based upon" OBB's alleged commercial activity in the United States. The Court relied upon its decision in Saudi Arabia v. Nelson, in which it determined that this inquiry requires a court to "identify[] the particular conduct on which the [plaintiff's] action is 'based,'" by looking to the "the 'gravamen of the complaint,'" or "those elements ... that, if proven, would entitle a plaintiff to relief."3 The Court found that the Ninth Circuit's decision did not comport with this standard. Specifically, the Court found that while the U.S. sale of the Eurail pass indeed provided "an element" of her claim, "[u]nder Nelson ... the mere fact that the sale of the Eurail pass would establish a single element of a claim is insufficient to demonstrate that the claim is 'based upon' that sale."4 The Court explained that a "one-element approach" was incompatible with Nelson, which required an analysis of the "gravamen" of the claim, or the "core of [the] suit."5 Citing Justice Holmes, the Court noted that "the 'essentials' of a personal injury narrative will be found at the 'point of contact'—'the place where the boy got his fingers pinched.'"6

In this case, "the gravamen of Sachs's suit plainly occurred abroad," as "[a]ll of her claims turn on the same tragic episode in Austria, allegedly caused by wrongful conduct and dangerous conditions in Austria, which led to injuries suffered in Austria."7 The Court also reiterated its concern that applying a broader standard "would allow plaintiffs to evade the Act's restrictions through artful pleading."8 To wit, any plaintiff could "recast virtually any claim of intentional tort ... as a claim of failure to warn, simply by charging the defendant with an obligation to announce its own tortious propensity before indulging it."9 This, the Court held, would "effectively thwart[] the Act's manifest purpose."10

This is becoming a familiar approach of the U.S. Supreme Court. Whether presented as a question of sovereign immunity, personal jurisdiction,11 or statutory interpretation,12 claims for acts occurring abroad are getting pushed away from U.S. shores.

The Upshot for U.S. Business Interests

The Supreme Court's decision in Sachs illustrates the difficulty of obtaining jurisdiction under the FSIA. The "gravamen" of a commercial tort committed by a foreign sovereign will rarely occur in the territorial United States,13 and while political expropriations and nationalizations can sometimes be addressed by U.S. courts, the exception from immunity in those cases is vanishingly small.14 Accordingly, putative plaintiffs with claims against foreign sovereigns are increasingly forced to thread the eye of a needle to sustain the jurisdiction of a U.S. court.

Ms. Sachs had little opportunity to plan for the risk of a personal injury while traveling in Europe; she could not, as a practical matter, force the putative defendant to consent to U.S. jurisdiction or international arbitration when she bought the ticket and left for Europe. Business interests, though, have much more leverage when transacting or investing abroad, and there are four considerations they should keep in mind.

First, to the extent that a U.S. party wants resort to a U.S. court for its foreign sovereign contracts, it is important to structure the transaction so that the "gravamen" of any breaches will be in the United States. Where, for instance, a foreign sovereign breaches a contract by failing to complete a contractual obligation that must be performed in the United States (for example, payment in U.S. dollars into a U.S. account), such a breach is usually sufficient to be a direct effect in the United States and, thus, implicate the commercial activity exception to the FSIA.15

Second, state parties can consent to a particular forum—like U.S. courts—to settle their disputes, and such a choice is typically respected.16 That choice may also strip a state or state-owned entity of its sovereign immunity.17 Again, though, it should come as no surprise to learn that states and state-owned entities rarely agree to having their acts—even their commercial acts—adjudicated by a foreign court.

Third, a more typical strategy is for the parties to choose international arbitration in a third state. If a state or state-owned entity can meaningfully contract (to the purchase or sale of good, for instance), it can also meaningfully consent to a private arbitral forum to resolve any disputes resulting from the contract. Sovereign immunity is not implicated, at least at the outset, and the choice to arbitrate will typically be enforced.18 Immunity issues will arise down the line only if the claim is successful, the respondent refuses to pay, and the claimant needs to attach the state's assets to satisfy the award.

Fourth, when a state or state-owned entity will not agree to specify a neutral forum, that choice can, in some respects, be unilaterally imposed on it. Private parties who are broad-based "investors" in a foreign state—because, for instance, they own shares in local companies, tangible or intangible rights, and long-term operations—can and should structure those investments to take advantage of investment treaties. There are more than 3,000 such treaties in force, and by routing that investment through a country that has an investment treaty with the host state, disputes arising from those investments (and even the contracts in furtherance of those investments) can be subject to compulsory arbitration against the state. With this simple step, the investor is assured of a neutral forum for its disputes.19

With these structures in place, the difficulties and idiosyncrasies of the FSIA can be largely avoided, and claims can be brought against a foreign state in a neutral forum (i.e., not its own courts). For multinational business interests, no less than personal injury plaintiffs like Ms. Sachs, this can often be a case-determinative result.


1 OBB Personenverkehr AG v. Sachs, 136 S.Ct. 390 (2015).

2 Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(2) (2012).

3 Saudi Arabia v. Nelson, 507 U.S. 349, 356-57 (1993) (citations omitted).

4 Sachs, 136 S.Ct. at 395.

5 Id. at 396.

6 Id. at 397 (citation omitted)

7 Id. at 396.

8 Id.

9 Id. (internal quotation marks omitted) (citation omitted).

10 Id. at 397 (internal quotation marks omitted) (citation omitted).

11 See Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011) (holding that the isolated presence of a foreign companies' products in the state as a result of others' actions do not justify general personal jurisdiction over that company for claims having nothing to do with those products).

12 See, e.g., Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013) (holding that the Alien Tort Statute does not apply to violations of the law of nations that take place in another sovereign's territory outside the U.S. and that there is a rebuttable presumption against extraterritorial application of the Statute); Morrison v. National Australia Bank, 561 U.S. 247 (2010) (holding that the antifraud provisions of U.S. securities laws apply only with respect to the purchase or sale of a security listed on a U.S. stock exchange or the purchase or sale of any other security in the United States).

13 See, e.g., Saudi Arabia v. Nelson, 507 U.S. 349 (1993) ("gravamen" of lawsuit of American employee of Saudi hospital bringing claim based on injuries arising from alleged detention and torture by Saudi government was Saudi Arabia, even though employee was recruited and signed an employment contract in the U.S.); Sun v. Taiwan, 201 F.3d 1105 (9th Cir. 2000) (lawsuit by parents of deceased American student who drowned in Taiwanese government cultural tour in Taiwan was found to be based in Taiwan even though based on failure to warn parents in the U.S. and administration and application to the cultural promotion took place in the U.S.).

14 For the expropriation exception to apply, property must be taken in violation of international law and such expropriated "property or any property exchanged for such property [must be] owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality [be] engaged in a commercial activity in the United States." Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(3) (2012); see Kalamazoo Spice Extraction Co. v. Provisional Military Govt. of Socialist Ethiopia, 616 F. Supp. 660, 663-65 (W.D. Mich. 1985) (finding jurisdictional nexus satisfied by Ethiopian government's alleged expropriation of majority ownership of American corporation's stock in Ethiopian corporation by failing to pay reasonable compensation for property seized).

15 See, e.g., Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618-19 (Argentine government's rescheduling of bond payments had a "direct effect" in U.S., the designated place of performance of Argentina's contractual commitments, even though bond holders were foreign corporations); Cruise Connections Charter Management v. Canada, 600 F.3d 661 (D.C. Cir. 2010) (finding a direct effect when the Canadian Police reneged on a contract to provide cruise ships to a U.S. corporation during the 2010 Winter Olympics). But see Helmerich & Payne Inter. Drilling Co. v. Bolivarian Republic of Venezuela, 784 F.3d 804 (D.C. Cir. 2015) (finding that Venezuela's breach of oil drilling contracts with wholly owned Venezuelan subsidiary of U.S. oil company did not cause a "direct effect" in the U.S.); Terenkian v. Republic of Iraq, 694 F.3d 1122 (9th Cir. 2012) (finding that non-deposit of oil payments in New York bank due to non-purchase of oil and non-sales to potential U.S. customers insufficient to constitute a "direct effect" of Iraq's termination of contracts for oil sale to Cyprus oil brokerage companies).

16 See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) (holding forum-selection clauses enforceable but subject to judicial scrutiny for fundamental fairness); M/A Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9-10 (1972) (finding forum-selection clauses "prima facie valid" even though they "have historically not been favored by American courts").

17 See Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(1) (2012).

18 Foreign Sovereign Immunities Act § 1605(a)(6); see also U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 241 F.3d 135 (2d Cir. 2001) (finding arbitration clause in charter party between U.S. charterer and Chinese government satisfied FSIA arbitration exception because China and the U.S. had both signed the Convention on Recognition and Enforcement of Foreign Arbitral Awards and the parties had agreed to the charter party containing arbitration clause).

19 See Jones Day Commentary, "United States Supreme Court Gives Deference to Arbitrators in Investment Treaty Cases," March 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Charles T. Kotuby Jr.
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions