Foreign states and their agencies engage in a variety of construction projects in the United States, all of which are subject to the Foreign Sovereign Immunities Act (“FSA”).[1] This article explains some of the key aspects of the FSA that foreign governments and contractors should consider when engaging in those projects.

Foreign States and Their Agencies

Foreign states are treated differently from their agencies for certain aspects of the FSA. In deciding whether an entity is the foreign state itself or an agency of it, courts typically evaluate the entity’s primary purpose. If governmental, the entity is considered the foreign state itself, and if commercial, the entity is considered an agency. One line of cases holds if the entity is an integral part of a foreign state’s political structure, it is considered the foreign state itself.

Jurisdictional Immunity

Foreign states and their agencies are immune from the jurisdiction of the courts of the United States and the states, unless an enumerated exception applies. The two most common exceptions for construction projects are the arbitration and commercial activity exceptions. These exceptions apply equally to foreign states and their agencies.

Arbitration Exception

Courts have jurisdiction to enforce arbitration awards rendered against foreign states and their agencies pursuant to an agreement to arbitrate. Therefore, choosing arbitration as the binding method of dispute resolution in a construction contract with a foreign state or its agency activates this exception and paves the way to obtain a judgment against that foreign state or its agency to enforce an eventual arbitration award.

Commercial Activity Exception

Courts have jurisdiction where the action is based on a commercial activity the foreign state or its agency carries on in the United States. A commercial activity is defined as a commercial transaction or act. An activity is commercial if it is the type of activity in which commercial parties typically engage. The relevant inquiry is the nature of the act itself (construction pursuant to a construction contract), rather than its purpose (to improve an embassy used for diplomatic functions). In this regard, the FSA’s legislative history explains contracting for repairs to an embassy is a commercial activity even though embassies, consulates, and similar diplomatic buildings are not used for a commercial activity. The distinction between an underlying claim being based on a commercial activity giving rise to jurisdiction, and a building being used for a commercial activity potentially making it subject to execution to satisfy a judgment, is discussed in the next section.

Execution Immunity

Even if there is no jurisdictional immunity and a judgment is entered against a foreign state or its agency, that entity’s property located in the United States is immune from being sold to satisfy the judgment unless an enumerated exception applies. This is referred to as execution immunity. The two most common exceptions to execution immunity arising from construction projects are the arbitration and commercial activity exceptions. Although they sound the same as the jurisdictional immunity exceptions, these exceptions differ with respect to execution immunity. Further, although the arbitration exception is the same for foreign states and their agencies, the commercial activity exception is not and is harder to establish for foreign states.

Arbitration Exception

If a judgment against a foreign state or its agency is based on the enforcement of an arbitration award, then any property of that foreign state or its agency located in the United States that is used for a commercial activity may be attached and sold to satisfy that judgment. For this exception, the property need not be related to the underlying arbitration award. The key is that the property must be used for a commercial activity. As noted above, embassies, consulates, and similar diplomatic buildings are not used for a commercial activity. Accordingly, those buildings are beyond the reach of this exception.

Commercial Activity Exception

If the court has jurisdiction against a foreign state because the action is based on a commercial activity, then the property that is the subject of that action can be attached and sold to satisfy the judgment, but only if that property is used for a commercial activity. This exception is narrow because only the property that is the subject of the underlying suit is subject to execution and only if it is used for a commercial activity. This exception does not apply to actions based on the construction or improvement of embassies because those buildings are not used for a commercial activity. This exception becomes broader with respect to an agency of a foreign state. If the court has jurisdiction against an agency of a foreign state because the action is based on a commercial activity, then any of that agency’s property in the United States that is used for a commercial activity can be attached and sold to satisfy the judgment. The key distinction is the property need not be related to the underlying action.

Conclusion

Foreign states and their agencies should expect the courts of the United States and the states to have jurisdiction over them for disputes arising from design and construction contracts for projects in the United States either because those transactions will be deemed to be commercial activities or if the contract calls for arbitration of disputes. Nonetheless, foreign states should think carefully about agreeing to arbitrate in those contracts. Agreeing to arbitrate does not provide a contractor or designer much of an advantage in establishing a court’s jurisdiction over a foreign state based on a claim stemming from a construction or deign contract because the path to jurisdiction based on the commercial activity exception is an easy one in this context. However, by agreeing to arbitrate, all of a foreign state’s property in the United States used for a commercial activity is subject to execution to satisfy the arbitration award, whereas if a foreign state does not agree to arbitrate and jurisdiction is based on the commercial activity exception, then only the foreign state’s property that is the subject of the underlying suit is subject to execution, and only if it is used for a commercial activity.