The Extension of Sovereign Immunity to Government-Owned Commercial CorporationsAuthor(s): Arthur K. KuhnSource: The American Journal of International Law, Vol. 39, No. 4 (Oct., 1945), pp. 772-775Published by: American Society of International LawStable URL: http://www.jstor.org/stable/2193419 .

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772 THE AMERICAN JOURNAL OF INTERNATIONAL LAW

THE EXTENSION OF SOVEREIGN IMMUNITY TO GOVERNMENT-OWNED COMMERCIAL CORPORATIONS

The fact that extensive commercial activities of modern governments are so frequently carried on beyond their borders by government-owned corpora- tions has resulted in an ever expanding reliance upon sovereign immunity when such corporations are sued in foreign courts. This presents a serious problem in the administration of justice. The distinction between agencies of foreign governments engaged in a public function and those which are engaged in purely private commercial transactions has long been recognized. While the definition of these purposes is sometimes difficult in borderline cases, the distinction in general is valid. Thus a corporation for the produc- tion or purchase of petroleum exclusively for the supply of the armed forces should be entitled to immunity, while a corporation engaged in the general petroleum business for profit in behalf of a country which had nationalized the industry should not be so entitled.

The distinction between the public and private activities of state agencies which assert a claim to immunity before foreign courts was considered but not directly passed upon by the United States Supreme Court in the case of The Pesaro,' and also in the more recent case of The Baja California.2 Both of these decisions were rendered in libel actions against ships claimed to be owned by a foreign government. In The Baja California case it was not disputed that the ship was owned by the Mexican Government but at the time of the libel it was in the possession of a Mexican corporation which was employing it for private profit. The ship not being in the possession of the government which owned it, there was no direct interference with sovereign right. The general immunity of the government was not denied. Mr. Justice Frankfurter, in his concurring opinion, went further and favored the removal of immunity not only from vessels not in possession of the foreign

world. Regardless of the skeptics, who think people never learn from experience, I believe our people now recognize that neutrality and nonintervention constitute a dis- astrous foreign policy." (Cong. Rec., July 23, 1945, p. 8097.)

Assistant Secretary of State Berle, November, 1943: "Nor have we any intention to scrap the well-settled policy of non-intervention in the affairs of other states. The policy of non-intervention in other peoples' affairs is and must be the first principle of sound doctrine. Unless this is the settled practice of nations, there can be no principle of sovereign equality among peace-loving states and probably no permanent peace at all." (Department of State Bulletin, Nov. 27, 1943, p. 384, 386.)

If Senator Fulbright's view becomes the official national policy, it can readily be imagined that, without knowing much about the circumstances, the United States will be a party to every war occurring anywhere. This is supposed to make for the peace of the world. There is a considerable opinion urging United States intervention to insure the conformity of for- eign domestic governments with American wishes. See Loewenstein, "The Trojan Horse," in The Nation, Vol. 159 (1944), p. 235. Criticism in Orton, The Liberal Tradition, New Haven, 1945, pp. 231-239. What legal effect the atomic bomb will have is unpredictable.

1 Berizzi Bros. v. SS. Pesaro, 1926, 271 U. S. 562. See the writer's editorial comment in this JOURNAL, Vol. 21 (1927), p. 742.

2 SS. Baja California v. Hoffman, 1945, 89 Law. Ed. Advance Opinions 533.

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EDITORIAL COMMENT 773

government but also from those in possession when employed for private profit, unless the department of our own government charged with the con- duct of our foreign relations, or Congress, "explicitly asserts that the proper conduct of these relations calls for judicial abstention. Thereby responsibil- ity for the conduct of our foreign relations will be placed where power lies. " I Under this view, a finding in favor of immunity by the State Department would preclude any inquiry by the courts as to whether the vessel was or was not being employed in carrying out a public function. Although expressed as dictum, this view is in accord with the result reached in two earlier deci- sions of the United States Supreme Court relating to vessels owned and in the possession of a foreign government but engaged in commercial business for hire. In the language of Chief Justice Stone in one of the- cases, such a vessel is nevertheless "a public vessel." 4

This was manifestly not the opinion of the State Department as late as 1927 when, in an action against a French corporation in which the French Government held a part of the capital stock and for which immunity from suit in the United States courts was claimed by that government, the Secre- tary of State advised the Attorney General that it had long been the view of the Department "that agents of foreign governments engaged in ordinary commercial transactions in the United States enjoyed no privileges or im- munities not appertaining to other foreign corporations, agencies and in- dividuals doing business here and should conform to the laws of this country governing such transactions." 5

What then is the limit of this power of the political branch of our govern- ment to extend immunity from the jurisdiction of our courts? Is there any limit? The question has recently been presented in the Court of Appeals of the State of New York. In the Matter of the United States of Mexico v. Schmuck,6 a writ of prohibition was issued against a Justice of the New York Supreme Court from taking any further proceedings in an action brought by a New York corporation upon a warrant of attachment against funds in a New York bank, standing in the name of Petroleos Mexicanos, a Mexican corporation. This corporation was organized for the purpose of conducting a commercial enterprise not only in Mexico but abroad. It was authorized to acquire property, to contract for the sale of its products, to borrow money and to grant credits and, among other things, to lease, exploit or operate refineries in foreign countries. The assets of the company consisted in part of properties expropriated by Mexico from various oil enterprises. The Mexican company had bought materials from the American company (the

3 The same, at p. 539. 4 Compania Espanola v. The Navemar, 1938, 303 U. S. 68 at p. 74. Accord: Ex parte

Republic of Peru, 1942, 318 U. S. 578. 5 G. H. Hackworth, Digest of Intern,ational Law, Vol. II, p. 481, referring to United States

v. Deutsches Kalisyndikat Ges., 1929, 31 F. (2d) 199, 202-203. 6 United States of Mexico v. Schmuck, 1944, 293 N. Y. 264.

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774 THE AMERICAN JOURNAL OF INTERNATIONAL LAW

plaintiff in the original action) under a contract which provided that any questions or disputes which might occur relating to the subject of the con- tract " shall be determined by the laws of the State of New York and/or the laws of the United States of America." The Attorney General through the United States Attorney for the district, presented a "Suggestion of Im- munity " with respect to Petroleos Mexicanos and its property and attached a letter from the State Department. The suggestion concluded as follows:

By reason of the premises it has been conclusively determined that said Petroleos Mexicanos is immune from suit and its property from attachment and this suggestion of immunity having been recognized and allowed by the Executive Branch of the Government, and this sug- gestion of immunity having been filed pursuant to the directions of the Attorney General of the United States, it is the duty of this Court to dismiss the action against Petroleos Mexicanos for want of jurisdiction and to vacate any attachment or other process that may have hereto- fore been issued in this proceeding against any property of Petroleos Mexicanos.

Confronted with this unequivocal statement, the Court of Appeals felt constrained to accept the fact that the corporation was " conclusively deter- mined" by the executive branch of government to be entitled to enjoy the same immunity from jurisdiction which the Mexican Government would itself enjoy, without further judicial inquiry as to whether, under the facts and the law, the corporation was indeed a governmental agent pursuing a public function. The only issue left open for judicial determination was "whether in this case the evidence shows that the United States of Mexico through its agent consented to be sued"; and the cause was remitted to the lower court for a reference on this sole issue of a consent or waiver of im- munity.7

The question as to what constitutes a waiver of sovereign immunity, al- though frequently a difficult one, is not here under consideration. It is of the greatest consequence, however, to draw attention to certain repercus- sions likely to follow the expansion of the principle from its origin as the immunity enjoyed by a sovereign prince, then extended also to the person of certain state functionaries, then to the property in possession of the sov- ereign, and now finally to a corporation endowed with fictional personality and engaged in commercial pursuits. We recognize the importance of not embarrassing the political department of government in the conduct of for- eign relations. We have grave doubt, however, whether the surrender of the judicial function to examine the law and the facts upon which such immunity is predicated will result in the improvement of international relations. On the contrary, it tends toward a policy of perpetual appeasement which may lead to widespread abuse. It lays a burden upon the executive which, in a constitutional democracy, should be more readily borne by the courts through regeular judicial processes.

The same case on reargument, 1945, 294 N . Y. 265.

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EDITORIAL COMMENT 775

The question whether sovereign immunity should be extended to agents of foreign states engaged in commercial transactions will mount in importance with the nationalization of industry. In some countries all export and im- port is already completely in the hands of government. In others, even in hitherto so-called " capitalistic " countries, certain industries are coming into control and operation by the state. The problem in the United States is, therefore, not a mere question of jurisprudence, Federal or State, but one of high policy as well. In departing from its previously expressed policy the State Department may, we believe, have unwittingly admitted a Trojan horse and taken a step which may lead to serious consequences. The courts have indeed surrendered to the place "where power lies."

It would be interesting to learn whether the Department acts upon a mere ex parte application for immunity after process against the foreign corpora- tion has been instituted, or whether the plaintiff in the court proceedings is given an opportunity to be heard. Otherwise, the plaintiff has been de- prived of his right without his day in court, by action which the court now declares to be final. Again, is the action taken by the Department to be affected by the momentary diplomatic relations existing between the United States and the particular foreign nation? Would the action have been the same in the case mentioned, if the foreign state had been Argentina or Spain instead of Mexico?

All these questions are rendered even more perplexing when we contem- plate the new economic conditions resulting from the widespread ruin of the war. Cartels may disappear but in their place will come huge corporations for commercial business created and owned by foreign governments. Under the new immunity rule these will be free from process in our courts while native citizens and domestic corporations doing business with such corporations within our own borders will enjoy no such immunity at home or abroad. As there are no international tribunals to which such citizens and corporations may have access, they will be obliged to seek redress before the courts of the particular foreign state, although the transactions occurred within the United States. The threat to free enterprise which all of this implies is only too obvious.

ARTHuR K. KUHN

THE VALUE OF INTERNATIONAL LAW IN OCCUPIED TERRITORY

International law has received some savage blows during the past few years but it has also functioned under many and varied circumstances. Interesting testimony on these points comes from the Island of Guernsey. On May 23, 1945, Jurat John Leale, President of the State Controlling Committee, addressed the statesmen of Guernsey assembled at the Royal Court. His address, which, as distributed in mimeograph by the Commit- tee, occupies twenty-two pages of closely typed foolscap paper, was de-

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