Apr 5

The “Commercial Activity” Exception to Sovereign Immunity

§1605(a)(2) allows U.S. district courts to assert jurisdiction over a foreign State in actions based upon:

  • a commercial activity carried on in the United States by the foreign state; or
  • an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or
  • 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.

A related exception to immunity from execution is found in Section 1610 of the FSIA on the basis of commercial activity in the United States, “commercial activity” being identically defined by courts in both provisions.  Aurelius Capital Partners v. Argentina, No. 07 Civ. 2715 (TPG), 2008 U.S. Dist. LEXIS 101764, *35-36 (S.D.N.Y. Dec. 11, 2008) (reversed and vacated 584 F.3d 120 (2d Cir. 2009).

So what counts as commercial activity? 

The Supreme Court has explained that “when a foreign government acts, not as regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are commercial” within the meaning of the FSIA.  Argentina v. Weltover, 504 U.S. 607, 614 (1992).  In Weltover, Argentina had engaged in commercial activity in the United States by “issuing negotiable debt instruments denominated in United States dollars and payable in New York and [] appointing a financial agent in that city.”  See also Greylock Global v. Province of Mendoza, No. 04 Civ. 7643 (HB) 2005 U.S. Dist. LEXIS 1742, at *18 (S.D.N.Y. Feb. 8, 2005) (Province of Mendoza, Argentina, had engaged in commercial activity in the United States by issuing bonds denominated in dollars subject to an Indenture governed by New York law and appointing a New York bank as trustee).

Similarly, sovereigns have been found to engage in commercial activity by entering contracts for services or for the purchase and sale of goods.  See Texas Trading & Milling Corp. v. Nigeria, 647 F.2d 300, 310 (2d Cir. 1981) (“Nigeria’s activity here is in the nature of a private contract for the purchase of goods.  Its purpose to build roads, army barracks, whatever is irrelevant.  Accordingly, courts in other nations have uniformly held Nigeria’s 1975 cement purchase program and appurtenant letters of credit to be “commercial activity,” and have denied the defense of sovereign immunity”).

The Legislative History of the FSIA makes clear that the state’s intended use of the goods and services it procures through a contract – i.e., whether the state intends to use its profits for a public purpose – is irrelevant to the question of whether it is engaged in commercial activity in the first place.  “Thus, a contract by a foreign government to buy provisions or equipment for its armed forces or to construct a government building constitutes a commercial activity. The same would be true of a contract to make repairs on an embassy building. Such contracts should be considered to be commercial contracts, even if their ultimate object is to further a public function.”  House Judiciary Committee, Jurisdiction of United States Courts in Suits Against Foreign States, H.R. Rep. No. 1487, 94th Cong., 2d Sess. 1, 17 reprinted in [1976] U.S. Code Cong. & Admin. News 6604, 6615.

One question whose answer remains unclear is whether a sovereign is entitled to immunity in actions based on the sovereign’s investment in securities that are publicly traded on an American exchange.  Judge Griesa of the Southern District of New York has decided an opinion touching on this subject which has since been vacated and reversed by the Second Circuit Court of Appeals.  He decided that investments in publicly-traded American securities on behalf of the Argentine state pension fund should count as commercial activity.  Aurelius Capital Partners v. Argentina, No. 07 Civ. 2715 (TPG), 2008 U.S. Dist. LEXIS 101764, *36 (S.D.N.Y. Dec. 11, 2008) (ordering attachment of investment funds held by Argentine entity in New York bank).  Rejecting Argentina’s argument that it had used the funds for “continuous deposits and withdrawals for the purpose of actually paying pension benefits or any other government expenses” on the basis that Argentina had failed to produce evidence to this effect, Judge Griesa concluded that the funds had been invested “in the hope of profit in the manner that any investor would so invest.”  Id. at *37.

Judge Griesa appeared to base this conclusion on evidence that the Argentine government had been systematically using these funds for non-pension government uses and intended to continue this practice.  His placement of a sovereign act (here, investing in securities) in the public-to-commercial spectrum thus seems influenced by the intended use of profits generated by the investment — a factor that the Second Circuit Court of Appeals deemed irrelevant to their treatment of a sales contract in Texas Trading.

The Second Circuit vacated Judge Griesa’s decision on an unrelated ground, finding that the relevant funds had heretofore only been managed by private corporations on behalf of Argentina and that Judge Griesa’s attachment order – which became effective upon transfer of legal title to the funds from the private corporation to a public entity – was in violation of the FSIA because the public entity had not had any opportunity to use the funds for any purpose at all – commercial or otherwise.  Aurelius Capital Partners v. Argentina, 584 F.3d 120, 131 (2d Cir. 2009).  Since the plaintiffs had not claimed that the private corporation which had previously managed the funds was an alter ego of the Argentine state or otherwise liable for Argentina’s debts, the Court of Appeals did not reach the matter of whether the investment of social security assets is a “quintessentially government activity” that is not commercial under the FSIA.  The answer to our question, it seems, remains unclear for the time being.

This is by no means an exhaustive treatment of the commercial activity section under the FSIA.  Please don’t hesitate to contact any of our attorneys if you would like to discuss an issue relating to the FSIA in more detail.

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