October 01, 2004 | By Keith Martin in Washington, DC

Creditors of foreign governments can “garnish” taxes and royalties that US companies owe the governments, a US appeals court ruled in late September.

The Republic of Congo defaulted on a loan from Equator Bank to build a highway.  Equator Bank assigned the loan to the Connecticut Bank of Commerce, and the Connecticut bank sued in London and the US courts for repayment and then moved to enforce the judgment by seizing assets belonging to the Congo in the United States.  A US appeals court held that among the assets subject to seizure are taxes and royalties that three Texas companies owe the Congo as participants in an oil joint venture with a state-owned Congolese company.

The Congo argued that its assets are protected from seizure by sovereign immunity — the right of governments to be insulated from suits.  It had waived sovereign immunity in the loan agreement, but argued that it was nevertheless protected from suit under a US law called the Foreign Sovereign Immunities Act, under which a waiver of immunity is effective only against property that is “in the United States” and is being “used for commercial activity in the United States.” The appeals court said both requirements were met in this case.  The case is Republic of Congo v. CMS Oil and Gas et al.

Such decisions create practical problems for the US companies involved; they may find it hard to continue doing business in the country. 

Keith Martin