District Court finds Korean Agency’s Decision to Enter into Contract with “Best Efforts” Clause to fall within FSIA “Commercial Activity” Exception

The World in U.S. Courts: Winter 2016 - Alien Tort Statute (ATS)/Political Question Doctrine/Foreign Sovereign Immunity Act (FSIA)/ Act of State Doctrine | October.24.2016

BAE Systems Technology Solution & Services, Inc. v. Republic of Korea’s Defense Acquisition Program Administration (DAPA), US District Court for the District of Maryland, October 24, 2016

BAE was the lead contractor under an agreement between the US Government and DAPA, a Korean governmental agency, to upgrade certain aspects of the Korean military.  Disputes arose, and BAE filed suit for a declaration that it was not liable under a contractual guarantee and to prohibit DAPA from pursuing litigation in Korea alleging a breach of contract.

The Court first considered whether the case fell within the “commercial activity” exception to the FSIA, which otherwise broadly immunizes foreign sovereigns against suits in US courts.  As a technical matter, DAPA could be deemed to have waived reliance on sovereign immunity because it failed to raise that argument as an “affirmative defense” in its answer.  But the Court, noting that waivers of sovereign immunity are to be construed narrowly, addressed the potential FSIA defense nonetheless.  On the merits, the Court observed that the relevant question in determining whether the “commercial exception” applied was whether the "core" of the suit concerned actions by a sovereign (DAPA) that are commercial in nature.  The claim here involved BAE’s alleged breach of an agreement to use its “best efforts” to prevent a substantial increase in the cost of upgrades to the Korean Air Force.  The Court concluded that “[e]ntering into a contract that includes a best efforts clause and is a prelude to a military sales contract is itself commercial activity.”  The Court also determined that the jurisdictional requirement that the commercial activity occur “in the United States” was satisfied because the claim turned on a US company’s discharge of its alleged contractual obligations to affect US Government decisions and a claim that BAE pay US dollars to DAPA.  For these reasons, sovereign immunity was found not to require dismissal of the claims.

Finally, the Court addressed the Act of State Doctrine, which prohibits courts from reviewing the sovereign acts of other countries undertaken within their own borders.  While South Korea had issued a “notice of confiscation” of a BAE performance bond, no confiscation had occurred that would be the subject of suit.  And because the Court had only entered a preliminary injunction against maintenance of South Korea’s litigation in South Korea so that the merits of the contract claim could be addressed, it did not consider that its order had interfered with a sovereign decision to pursue litigation locally.

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