Third World Government Contracting: Collecting from A Foreign Sovereign

By Richard Sternberg

In the world as it exists after the Cold War, there has been a significant expansion in international trade opportunities vending to emerging and third world nations. Without the competition between superpowers to spend foreign aid money seeking alliances with the third world, more nations have entered the commercial markets to purchase goods and services, including everything from air travel goods, to construction, to modern technology, to oil and mining supplies and servicing, food, medical services and supplies, and other goods and services previously obtained by foreign aid grants. Many of these countries possess significant wealth to match their significant needs. There are opportunities available in this form of government contracting that modern competitors in the U.S., E.C., and Pacific Rim cannot afford to ignore.

There is significant risk in this market, however. Market risks are unlike the normal business risks of international transactions, for the purchasers are often governments or government agencies. Without proper planning, the sovereign buyer will be immune from lawsuit. The devices of the international letter of credit or international arbitration are often inconvenient or unacceptable to the government purchasing agent. As a result, the merchant faces a risk that the buyer will refuse or substantially delay payment, unilaterally change the terms of the agreement, or find grounds to dispute the transaction knowing that there is no effective mechanism for resolving the dispute. Business people who are familiar with government contracting in the West are aware that Western governments can play these same games, which can ultimately drive a supplier out of business, but without a tolerable mechanism for enforcement of contracts, trade in this potentially profitable market becomes too risky. A competitor which can reasonably secure its payment can avoid charging a substantial risk premium and can offer more competitive pricing.

In the shadow of the Cold War, most of the Third World recognizes the likely significance of the United States in world diplomacy and have created international banking and financial arrangements in the United States to complement and facilitate their diplomatic efforts. Such international banking arrangements within the U.S. are essential in the modern world, and emerging nations cannot afford to abandon them, even when the United States openly flaunts its use of subpoenas and electronic intelligence to trace financial transactions through the United States. Handled correctly, this potential source for paying damages — as well as the foreign sovereign’s desire not to get bad publicity in the local newspapers in Washington — makes it tactically convenient to find some basis for adjudicating disputes between merchants and sovereigns within the United States. That source is the U.S. Foreign Sovereign Immunities Act (the “FSIA”), 28 U.S.C. §§1602 et seq., and a merchant who plans its contract in advance can obtain jurisdiction in the U.S., thereby massively improving its ability to collect on its contracts both by litigation and by pre-litigation pressure to comply with the contract.

There are some additional start-up costs involved in entering this trade. The FSIA cannot be used to protect a foreign company from non-payment in a foreign contract, but through the magical fiction that corporations are citizens wherever they are formed, the FSIA can protect the wholly owned American corporate subsidiary of that same foreign company if its duties include managing the contract.1 The FSIA strictly limits jurisdiction to only four categories of lawsuit, but a foreign sovereign can consent to jurisdiction with the most innocuous of language placed in a contract, or, even, by contracting to make payments in the United States. 28 U.S.C. §1605.

It is difficult to reveal the many techniques to be considered in foreign government contracting in a brief article, but merchant companies considering trade with foreign sovereigns ought to review with their counsel the formation of an American subsidiary in the Washington metropolitan area to manage the government contract in order to maximize its ability to enforce and collect on the contract. Including language in the contract that places the contract under U.S. law and submits the buyer to U.S. jurisdiction in a manner designed to work within the FSIA subtly can become an enormous competitive benefit.

© Richard S. Sternberg, 2002

Footnote:

1 See 28 U.S.C. §1332 (2007). This is expressly inapplicable to shippers under the Shipping Act, 46 U.S.C. §802(a), but was applied in Phoenix Consulting v. Republic of Angola, 216 F.3d 36 (D.C. Cir. 2000). The property in the Phoenix case was owned by, and the contracts were made with, the U.K. parent corporation. The U.S. subsidiary corporation arguably hired the agent. The Court remanded the case to the district court after concluding in the first line of the background that plaintiff was “a United States affiliate” of the alien parent corporation. Defendant argued vociferously and unsuccessfully that this made the U.S. subsidiary corporation an alien outside the jurisdiction granted by the FSIA.