Development banks: Immunity from lawsuits

Development banks: Immunity from lawsuits

June 19, 2019 | By Jeremy Hushon in Washington, DC, Rachel Rosenfeld in Washington, DC, and Jonathan Franklin in Washington, DC

A US Supreme Court decision has left room for debate about when development banks can be sued in US courts.

The court held in late February that the International Finance Corporation does not have absolute immunity from such lawsuits. In so doing, the court reversed decades of precedent and practice under which IFC had enjoyed such status.

The Supreme Court held that the International Organizations Immunities Act of 1945 (IOIA) affords international organizations, such as IFC, the same immunity from suit that foreign governments enjoy today under the Foreign Sovereign Immunities Act of 1976 (FSIA).

In other words, IFC enjoys immunity that is limited by various exceptions, such as engaging in commercial activities, as opposed to virtually absolute immunity it had when the IOIA was originally enacted.

The opinion included a number of stipulations noting how the ruling might not affect all international organizations equally. Furthermore, the FSIA will still afford IFC and other international organizations some degree of immunity protection.

The case is Jam et al. v. International Finance Corp.

 IFC was one of several lenders that made loans of $450 million in 2008 to finance a coal-fired power plant in Gujarat, India.

A group of Indian fishermen supported by EarthRights International, a non-governmental public interest organization, sued IFC for damages and injunctive relief in federal district court in Washington, where IFC’s headquarters are located. The suit alleges that IFC failed properly to enforce the covenants in its loan agreement and thus failed to prevent or stop the power plant from polluting its environs. Of note, the plaintiffs have elected, at least to date, only to sue IFC. They have not brought suit against the owner of the plant or any of the other lenders to the project.

IFC’s initial defense was to claim absolute immunity from suit under the IOIA. Both the district court and a US appeals court where the decision was initially appealed applied longstanding precedent to dismiss the case, holding that IFC was entitled to the virtually absolute immunity accorded foreign governments when the IOIA was enacted. The fishermen appealed to the Supreme Court, arguing that the IFC was entitled under the IOIA only to the limited immunity that foreign governments currently enjoy, and they were backed by an amicus brief from the US government.

The Supreme Court reinstated the lawsuit and sent the case back to the district court for further proceedings.

Take-Away Points

The opinion points out that an international organization’s charter may specify a higher level of immunity, citing the United Nations charter as an example, which specifies that the UN “shall enjoy immunity from every form of legal process except insofar as in any particular case it has expressly waived its immunity.” The charter of the International Monetary Fund includes a similar statement of immunity. This type of specified immunity is not affected by this ruling. Notably, the IFC’s articles do not include any statement of immunity from lawsuits.

While acknowledging that commercial activity is an exception to immunity under the FSIA, the opinion notes that “it is not clear that the lending activity of all development banks qualifies as commercial activity within the meaning of the FSIA.” To be considered “commercial,” an activity must be “the type” of activity “by which a private party engages in” trade or commerce. Thus, for example, a loan by the World Bank to a foreign government may not be considered commercial in nature.

In addition, the opinion says that “even if an international development bank’s lending activity does qualify as commercial, that does not mean the organization is automatically subject to suit” as “the FSIA includes other requirements that must also be met.” For example, for immunity to be abrogated under the commercial activity exception of the FSIA, the commercial activity must have a “sufficient nexus” to the United States, and the lawsuit must be “based upon” either the commercial activity itself or acts performed in connection with the commercial activity.

The opinion gives as an example a lawsuit brought based on tortious activity abroad as not “based upon” commercial activity within the meaning of the FSIA’s commercial activity exception. Presumably a development bank would have immunity from that type of lawsuit. Importantly, the opinion notes that at oral argument, the US government “stated that it has ‘serious doubts’ as to whether petitioners’ suit, which largely concerns allegedly tortious conduct in India, would satisfy the ‘based upon’ requirement.”

This case is an example of a type of activist litigation that bears watching by the entire finance community. EarthRights says its goal is to defend human rights and the environment by publicizing and bringing legal actions against organizations it believes are perpetrating abuses. Its strategy is to change the habits of international lending institutions by holding them accountable, as opposed to following the most direct path to achieve restitution for the aggrieved farmers and fisherman by taking legal action against the owners of the plant. Based on press coverage and its statements about the recent Supreme Court ruling, EarthRights is also aiming for accountability through publicity, regardless of what the eventual outcome of the case may be.

With its immunity under the IOIA now qualified by the FSIA, IFC and other similarly situated international organizations are likely to see an increase in lawsuits filed against them. This will then lead to debate about the past FSIA case law and some notable differences in status of international organizations, as compared to foreign countries, and further exploration of the scope of international organizations’ now more limited immunity from lawsuits in US courts.