Earlier this month, the U.S. Supreme Court made it a little easier to successfully bring foreign states and sovereign-owned and controlled-entities into U.S. courts.  In CC/Devas (Mauritius) Ltd. v. Antrix Corp. Ltd., a unanimous Supreme Court ruled that only two steps are required to keep a foreign sovereign in federal court.  First, a plaintiff must show an exception under the Foreign Sovereign Immunities Act (FSIA).  And second, a plaintiff must properly serve the defendant.  This means that investors seeking to hold foreign governments and foreign government-owned or controlled entities accountable for economic damages – and get at assets held in the United States – no longer have to go the extra distance of showing minimum contacts, as previously required by the Ninth Circuit, with the United States related to the conduct. The Supreme Court unanimously rejected this extratextual addition.  The removal of this extra step should make it more attractive for investors to enforce judgments or seek recovery in the United States, and give investors confidence that the U.S. courts will enforce their rights.

Investors will still need to make the two showings required by the FSIA before a U.S. court will exercise jurisdiction over a foreign sovereign. The burden is on the plaintiff to prove facts “supporting its claim that the FSIA exception applies.”  The burden then shifts to the defendant, who is seeking to avoid the U.S. courts, to “establish the absence of the factual basis by a preponderance of the evidence.”  By understanding the exceptions before making investments, investors can be better prepared in case they ever need to enforce a judgment in the U.S. against foreign-sovereign-owned assets.

There are three exceptions that investors can look to invoke when asserting claims against foreign sovereigns and instrumentalities: waiver ; commercial activity ; and arbitration . The waiver exception is often used to confirm arbitration awards.  The waiver exception can also be used when a sovereign agrees in a contract to the application of law of a specific country or to arbitration or jurisdiction of the courts of a specific country.  

The arbitration exception permits both enforcement of arbitration obligations and confirmation of arbitration awards. In the case of an arbitration award, confirmation in the U.S. permits attachment (seizure) of a foreign sovereign’s assets that are in the U.S. “Confirmation is the process by which an arbitration award is converted to a legal judgment.”  “It is only once an award is confirmed that the prevailing party may seek to execute on the resulting judgment ‘by, for example, attaching [the sovereign’s] commercial assets in the United States.’”  

Direct suit against a foreign sovereign in the U.S. for commercial activity that touches the U.S. in a significant way is another way to get jurisdiction over a foreign sovereign in the U.S.  The FSIA defines “commercial activity” as “either a regular course of commercial conduct or a particular commercial transaction or act.”  That commercial activity has to have “substantial contact with the United States.”  Courts have interpreted that to mean a “considerable domestic nexus”  between the commercial activity in the U.S. and the plaintiff’s cause of action.  The activity in the U.S. must have contributed to the immediate facts giving rise to the lawsuit.  

Investors should build into the diligence, contracting, and compliance stages of their transactions specific steps and processes that will make it easier to seek recovery of U.S.-based assets owned by a wayward counterparty that is a foreign government or government instrumentality. 

A first step is KYC diligence on who you are doing business with. Is your counterparty owned or controlled by the government in the country in which you are investing? Is there a bilateral or multilateral investment treaty in place? Does the investment treaty protect you (look at the domicile/residency of your investment vehicle, partners, and joint venturers)? How do local courts treat foreign investors? Does the investment treaty provide for arbitration of disputes at the investor’s option? If your counterparty defaults, where are its commercial assets? Are commercial assts located abroad? In which countries? In the U.S.? In the U.K.? By identifying where commercial assets are located at the outset, you can have confidence that, should something go wrong, you will have recourse to those assets. You can also identify if the countries in which commercial assets are located have mechanisms like the FSIA in the U.S. and the State Immunity Act in the U.K., that allow the seizure of sovereign-owned commercial assets. ,   

Next steps include completing diligence on your counterparty’s history of payment/nonpayment, treatment of foreign investors, early termination of investment contracts, and similar risks. Some countries and regions come with more risk than others. Not surprisingly, Russia and Venezuela rank #1 and #2 globally for outstanding unpaid investor-state arbitral awards as of 2024 ($60.7B USD and $17.1B USD, respectively), but surprisingly, Spain ranks #3 ($1.6B USD).  

Once you have worked up the background diligence, you can use it in the contracting phase. If you have identified commercial assets in the U.S., consider including New York law as the governing law. This could be considered an implicit waiver of sovereign immunity. Include a carefully drafted arbitration agreement  and/or jurisdiction of the courts in countries in which you have identified assets in the contract. This could be considered an implicit waiver of sovereign immunity. Negotiate for an explicit waiver of sovereign immunity – for both jurisdiction of courts or an arbitral tribunal and enforcement in the contract. Including liquidated damages and early termination damages will protect you if your counterparty terminates the project early.

When scoping out the project or investment, consider what aspects can be or will be done in the U.S. Document these aspects of the project and all commercial activity that happens in the U.S. in case it is needed later for enforcement purposes under the commercial activity exception to FSIA.

During the course of the project, keep good records. While this is good advice in general, it is key if you later have to arbitrate or sue to seek recovery under your investment contracts and then sue again in the U.S. (or elsewhere) to recover against sovereign-owned assets. 

Investors can have confidence that two steps are all that are required to seek the assistance of the U.S. courts. If they can prove an exception to the FSIA and serve the defendant, a U.S. court will take jurisdiction over the investment dispute, be it an arbitration award that needs to be confirmed in the U.S. before assets can be seized or a direct suit that will be prosecuted. The Supreme Court’s recent common-sense decision that the Foreign Sovereign Immunity Act means what it says should give confidence to investors everywhere.