Terenkian v. Republic of Iraq, No. 10-56708 (9th Cir. 2012), addresses the important international practice question of whether activity by a non-U.S. sovereign satisfies the “commercial activity” exclusion to the application of the Foreign Sovereign Immunities Act, thus permitting the federal courts to exercise subject matter jurisdiction over a matter.  

The case concerned alleged breaches of contracts between Cyprus-based oil brokerage companies and the Iraqi State Oil Marketing Organization (SOMO), which had been selling oil through the Oil for Food Program.  Although the original contract provided for arbitration in accordance with ICC rules and designated the place of arbitration as Baghdad, the plaintiff argued that this was impossible because Terenkian faced death threats in Iraq, and also argued that the district court could not compel arbitration because Iraq was not a signatory to the New York Convention.

The plaintiff argued that Iraq was the actual defendant in the suit and that it was not entitled to sovereign immunity.  It initially argued that the alleged breach of contract had direct effect in the United States because some of the oil from the contract, which was no longer available, was intended for distribution in the United States. Later, in the opposition of Iraq’s motion to dismiss, the plaintiffs argued that Iraq was not entitled to sovereign immunity under the FSIA because of the exemption for commercial activity carried on in the United States.  The plaintiffs argued that the contracts at issue were executed in New York.  Additionally, the plaintiffs argued the act of depositing money in the United Nations escrow account outside the U.S. instead of in a New York bank caused a direct effect in the United States because the payment was not deposited in the US (which the original contract had required).

Iraq (the new government) moved to dismiss for lack of subject matter jurisdiction, arguing that it was not a party to the contracts (rather SOMO was) and that the alleged breaches did not have direct effect on the U.S. because the place of performance was Iraq and that there was no evidence that any oil would go to U.S. customers.

The district court denied the motion to dismiss, holding that the commercial activity exception applied; the commercial activity outside the U.S. had a direct effect in the U.S., based on the contract requiring payment be made in New York. It did not address the plaintiff’s alternative arguments.

The Ninth Circuit reversed.  It held that Iraq’s participation in the Oil for Food Program was not a commercial activity that could be engaged in by a private player, as defined in governing precedent. Additionally, there was no evidence that Iraqi officials signed the contract in the United States, and even if they had, that would not constitute significant activity or substantial contact in the U.S. The Court of Appeals also held that the alleged breach did not have direct effects in the United States, as Iraq had no obligation to perform in the United States. It also found that neither a potential financial loss nor the distant potential of oil sale loss was sufficient to constitute a direct effect.