The Conundrum of International Organisations Immunities: Jam et al v International Finance Corporation  (Part 2 of 2)

[Rishi Gulati is a Barrister at the Victorian Bar, Australia; Dickson Poon Scholar of Law at King’s College London; and Academic Expert, Bretton Woods Law, London. This is the second of a two part post concerning recent litigation against the International Finance Corporation (‘IFC’) in US courts. Part I is available here.]

The recent case of Jam et al v International Finance Corporation (.pdf) is significant jurisprudence testing the boundaries of the express waiver of immunities granted to multilateral financial institutions. The 24 March 2016 decision of the US District Court for the District of Columbia can be found here (.pdf) (‘First Instance decision’); and the decision of the US Court of Appeals for the District of Columbia Circuit delivered recently on 23 June 2017 is here. Both those decisions are discussed below.

The First Instance decision– propagating the ‘1945’ approach to IO immunities

As discussed in my previous post, after being denied justice within the IFC’s institutional structures, the plaintiffs approached the national courts of the US to seek a remedy against the IFC for the injury caused due to the development and construction of the Tata Mundra Plant (the ‘Plant’).

Unsurprisingly, the IFC asserted its immunities under the US International Organisations Immunities Act of 1945 (‘IOIA’). The District Court upheld its immunity. Two matters are crucial for understanding the decision.

The first issue concerned the interpretation of the IOIA in terms of the standard of immunities that applies to international organisations such as the IFC. Specifically, does the IFC enjoy ‘absolute’ or ‘restricted’ immunity? Notably, the IOIA grants IOs immunities similar to those enjoyed by states. In 1945, states enjoyed virtually absolute immunity, and thus IOs enjoyed similar immunities. However, the evolution of the restrictive doctrine of State immunity culminating in the introduction of the Foreign Sovereign Immunities Act in 1976 (‘FSIA’) provided that states were only entitled to immunities in respect of their sovereign or governmental functions, not their commercial acts. The question then became whether this restricted view of state immunity was transposable to the immunities of IOs subject to the IOIA regime? Relying on precedent (Atkinson v Inter-American Development Bank, 156 F.3d 1335 (DC Cir 1998), the decision at First Instance (.pdf) concluded that under the IOIA, IOs continued to enjoy immunities  as envisaged in 1945. Thus, the restrictive doctrine did not apply  to IOs such as the IFC.

Second, there was the question of how the IFC’s broadly phrased express immunity waiver was to be interpreted. The court used the language of a ‘corresponding benefit’ to read the IFC’s express waiver provision narrowly, ‘with careful attention to “the interrelationship between the functions of the [IFC] set forth in the Articles of Agreement and the underlying purposes of international immunities.”’ (First Instance decision, p. 8). The language of a ‘corresponding benefit’ has been presumably developed by the courts to address the problematic drafting of the express immunity waivers included in the constituent instruments of several international financial institutions. In Mendaro, it was said that ‘most organizations would be unwilling to relinquish their immunity without receiving a corresponding benefit which would further the organization’s goals’. Immunity in that case was only restricted for ‘actions arising out of [an organisation’s] external commercial contracts and activities’. The rationale is that if external parties do not have an option to seek legal redress against an organisation concerning such actions, they might not be minded to do business with it. Hence, the corresponding benefit to the IO would demand a waiver in such circumstances.

In Jam v IFC, the plaintiffs argued that as the claims arose out of the IFC’s external activity, the express waiver of immunities was triggered. The Court rejected this argument, distinguishing the current case from other examples, and read the express waiver very narrowly as applying only when the claimant is an external party in a direct contractual or business-like relationship with the organisation (First Instance decision, p. 9). The Court went on to weigh the costs and benefits of any waiver. It is apparent that the more the Court is required to scrutinise the internal functioning of an organisation, the less likely a waiver would apply, with the court concluding  that ‘suits like the plaintiffs’ are likely to impose considerable costs upon IFC without providing commensurate benefits. Hence, IFC has not waived its immunity to this suit’ (First Instance decision, pp 11-12).

The Appeal decision: The disjunction of State and IO immunities

On 23 June 2017, in Jam et al v International Finance Corporation, the US Court of Appeals for the District of Columbia Circuit dismissed the plaintiffs’ appeal (‘Appeal Decision’). Despite noting that the IFC did not deny the harm caused to the plaintiffs, two out of the three judges endorsed the reasoning of the District Court (Appeal decision, p.1). Although concurring with the result, Judge Pillard’s reasons deserve a special focus for they demonstrate the need for a fundamental shift in approach. Judge Pillard observed: ‘I agree that Atkinson and Mendaro, which remain binding law in this circuit, control this case. I write separately to note that those decisions have left the law of international organizations’ immunity in a perplexing state. I believe both cases were wrongly decided, and our circuit may wish to revisit them.’ (Appeal decision, p. 11)

First, on the question whether the FSIA’s restrictive doctrine of State immunity should also apply to IOs, preferring the approach taken by the Third Circuit, in the Appeal Decision, Judge Pillard said:

We took a wrong turn in Atkinson when we read the IOIA to grant international organizations a static, absolute immunity that is, by now, not at all the same “as is enjoyed by foreign governments,” but substantially broader. Reading the IOIA to dynamically link organizations’ immunity to that of their member states makes sense. The contrary view we adopted in Atkinson appears to allow states, subject to suit under the commercial activity exception of the FSIA, to carry on commercial activities with immunity through international organizations…Were I not bound by Atkinson, I would hold that international organizations’ immunity under the IOIA is the same as the immunity enjoyed by foreign states. Accord OSS Nokalva, Inc. v. European Space Agency, 617 F.3d 756, 762¬64 (3d Cir. 2010) (declining to follow Atkinson and holding that restricted immunity as codified in the FSIA, including its commercial activity exception, applies to international organizations under the IOIA).

Judge Pillard’s preference for restricting IO immunity may yield some benefits for plaintiffs seeking justice against international organisations in the US. However, if eventually adopted, it should be limited to the specific context of the IOIA. Brief remarks on the issue are warranted here.

It is unfortunate that the IOIA links the immunities of IOs to that of states. The basis of state and IO immunity is different. It is well known that state immunity is a basic tenet of international law justified by sovereign equality, whereas IO immunities are treaty-based and functional. Equating state immunity with IO immunity confuses the regime. The immunity of an IO is to be determined with reference to its functions, which may be commercial in nature, as is the case with the multilateral development banks. That is perhaps the reason why the express waiver is written into the IFC’s Articles of Agreement. Thus, the scope of IO immunities ought to be determined by reference to their underlying rationale – functional necessity. Indeed, the problematic nature of using the commercial v non-commercial exception to assess the IFC’s immunity was pointed out by Judge Silberman (with Judge Edwards agreeing):

Ironically, the line of cases applying Mendaro ended up tying waiver to commercial transactions, so there is a superficial similarity to the commercial activities test that appellants would urge us to accept. But whatever the scope of the commercial activities exception to sovereign immunity, that standard is necessarily broader than the Mendaro test; if that exception applied to the IFC, the organization would never retain immunity since its operations are solely “commercial,” i.e., the IFC does not undertake any “sovereign” activities (Appeal Decision, p. 7).

Clearly, the linking of state immunity with IO immunity in the IOIA is a structural problem that remains. Be that as it may, the judiciary must work within the statutory framework. Judge Pillard’s views highlight the bizarre state of affairs where states, the creators of IOs, possess less immunities than IOs. When seen in that light, and taking into account the unsatisfactory structural framework of the IOIA, one can have much sympathy for Judge Pillard’s call for a new approach.

Importantly though, in the case at hand, it is the operation of the IFC’s express waiver provision that ought to be closely scrutinised. According to the criterion set out by the corresponding benefit test, the fundamental question is whether the IFC would receive a sufficient enough benefit should its immunity be restricted, and the plaintiffs’ claims be allowed to proceed to a hearing of the merits? Interestingly, while Judge Silberman (with Judge Edwards agreeing) acknowledged that ‘the term “benefit” is something of a misnomer’, it was concluded that the plaintiffs could not satisfy the substance of the corresponding benefit test set out in Mendaro (Appeal Decision, p. 9). However, Judge Pillard sought to demonstrate the arbitrariness of the corresponding benefit test, stating: ‘It is not entirely clear why we have drawn the particular line we have pursuant to Mendaro. Why are suits by a consultant, a potential investor, and a corporate borrower in an international organization’s interest, but suits by employees and their dependents not?’ (Decision of Judge Pillard in Appeal decision, p. 7)

Some brief conclusions

Ultimately, the concept of a ‘corresponding benefit’ is an attempt by a national judiciary to undo the consequences of problematic treaty language. The Court speculates whether or not a particular waiver will promote or restrict the goals or functions of an IO. It weighs the costs and benefits of any waiver of immunity to the IO. Overall, the more the courts are required to pass judgment on the internal operations and policies of an IO, the less likely it is that a waiver would apply. Critically though, the key problem with the corresponding benefit test is that costs and benefits can be perceived in different ways depending on the preferences of individual judges. Further, any suit against an IO will impact on the internal decision making of an IO in some way. The question will always be of degrees. So far, the courts seem to have addressed the risk of arbitrariness by reading the exception as narrowly as possible, with claims raising issues that would cause any intrusion into an IO’s policy sphere jurisdictionally barred. This narrow approach results in a denial of justice to already vulnerable plaintiffs.

As is demonstrated   by the case at hand, the IFC does not deny the harm caused to the plaintiffs by breach of the loan agreement. Further, it is apparent that the IFC disregarded the recommendations of the CAO, its very own accountability mechanism. In such circumstances, the effect of the decision of the national courts is that the plaintiffs, despite bringing a claim in the home forum of the IFC, have been denied justice and a fair hearing of their claims, which on all accounts appear to have significant merit. The plaintiffs have suffered grave injury, and their injury has now been compounded by denial of access to a remedy. The present case is another example of IO immunities prevailing over access to justice. Significantly, access to justice concerns have clearly seemed too impact Judge Pillard’s views:

Our cases seem to construe charter-document immunity waivers to allow suits only by commercial parties likely to be repeat players, or by parties with substantial bargaining power. But the opposite would make more sense: Entities doing regular business with international organizations can write waivers of immunity into their contracts with the organizations…Sophisticated commercial actors that fail to bargain for such terms are surely less entitled to benefit from broad immunity waivers than victims of torts or takings who lacked any bargaining opportunity, or unsophisticated parties unlikely to anticipate and bargain around an immunity bar (Decision of Judge Pillard in Appeal decision, p. 7).

Jam et al v International Finance Corporation joins a long line of cases where individuals suffering grave harm have been denied justice both at the institutional and the national level. Had the IFC positively responded to the CAO’s recommendations, national proceedings would not have been needed. But where justice is denied within the institutional legal order, considerations around the perceived independence of an organisation continue to trump the individual right to access justice generally, and a fair trial specifically. It is most unfortunate that international organisations such as the IFC who purport to deliver ‘lasting solutions for development’ choose to engage in conduct that leads to grave denials of justice to already vulnerable people who ought to be the very beneficiaries of their development activity.