The Verlinden Case -- Access to Federal Courts - Part 1 Chapter 1 - The Practice of International Litigation - 2nd Edition
Lawrence W. Newman has been a partner in the New York office of Baker & McKenzie since 1971, when, together with the late Professor Henry deVries, he founded the litigation department in that office. He is the author/editor of 4 works on international litigation/arbitration.
Michael Burrows, Formerly, Of Counsel, Baker & McKenzie, New York.
A principal purpose of the Foreign Sovereign Immunities Act of 19761 (the FSIA) was to codify contemporary concepts concerning sovereign immunity. The FSIA sets forth inter alia rules applicable to both state and federal courts for determining whether sovereign immunity exists. Congress, to assure that such rules would be applied consistently and to avoid having foreign states necessarily subjected to the vagaries of state courts, provided that all cases involving foreign states could be brought in federal court.
In April 1981, in Verlinden B.V. v. Central Bank of Nigeria, the Second Circuit concluded that the FSIA was unconstitutional to the extent it purported to permit an alien plaintiff to sue a foreign state in federal court on a non-federal claim. Insofar as American companies use foreign subsidiaries in transactions with foreign states, if upheld by the Supreme Court, the Verlinden decision could have the effect of relegating disputes arising in such transactions to state courts.
This chapter describes the issues posed by Verlinden, as well as the recent efforts to limit its scope.
In April 1975, Verlinden, a Dutch corporation with its principal place of business in Amsterdam, entered into an agreement with the Ministry of Defense of the Nigerian government to deliver 240,000 metric tons of cement to Nigeria at a price of $60 per ton. The government agreed to effect payment through an irrevocable letter of credit. In June 1975, the Central Bank of Nigeria (the Central Bank) established a letter of credit, payable through Morgan Guaranty Trust Company in New York, in favor of Verlinden for the full contract price. Beginning in August 1975, however, Nigeria’s ports became hopelessly crowded with ships delivering cement pursuant to approximately 100 other supply contracts. Nigeria’s solution to this congestion was to cause the Central Bank unilaterally to amend the irrevocable letters of credit issued in connection with the supply contracts, thereby adding terms and conditions which would delay delivery of the cement.