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DAR EL-BINA ENGINEERING v. REPUBLIC OF IRAQ

January 7, 2000

DAR EL-BINA ENGINEERING & CONTRACTING COMPANY, LTD. AND MISHARY AL-KAHLID & PARTNERS INTERNATIONAL COMPANY, W.L.L., PLAINTIFFS,
V.
THE REPUBLIC OF IRAQ, THE MINISTRY OF LOCAL GOVERNMENT — THE GENERAL ESTABLISHMENT FOR IMPLEMENTING WATER AND SEWERAGE PROJECTS OF THE PUBLIC OF IRAQ, THE MINISTRY OF HOUSING & CONSTRUCTION OF THE REPUBLIC OF IRAQ, AND AL-RAFIDAIN BANK, DEFENDANTS.



The opinion of the court was delivered by: Kaplan, District Judge.

  OPINION

This action is brought by two Kuwaiti companies for nonpayment of promissory notes guaranteed by an Iraqi bank. The threshold issue facing the Court is whether the Foreign Sovereign Immunities Act provides jurisdiction to adjudicate this action in a United States court, or whether the Iraqi bank is immune from suit by virtue of its status as an instrumentality of a foreign state.

Facts

Plaintiffs Dar El-Bina Engineering & Contracting Company ("Dar El-Bina") and Mishary Al-Kahlid & Partners ("Mishary") are both Kuwaiti companies with principal places of business in Kuwait. They are partners in two joint ventures that were involved in bidding on and completing construction projects for the Republic of Iraq. Iraq defaulted on the contracts, which were awarded by Iraq's Ministry of Housing and Construction of the Republic of Iraq ("Ministry of Housing") and Ministry of Local Government — The General Establishment for Implementing Water and Sewerage Projects ("Ministry of Local Government"), and later issued promissory notes in lieu of payments due to plaintiffs. Iraq subsequently defaulted on the promissory notes, which were guaranteed by defendant Rafidain Bank ("Rafidain"). Plaintiffs filed suit following this last default and Rafidain's corresponding failure to satisfy its obligations as guarantor of the notes, charging breach of contract, negligence, conversion, unjust enrichment, and default on the promissory notes. The complaint names both Ministries and the Republic of Iraq as well as Rafidain but, because Rafidain is the only defendant to appear before the Court, this opinion addresses only the rights and obligations of Rafidain.

The Tikrit and Hilla Construction Projects

In November 1980 the Ministry of Housing accepted a bid from plaintiffs, as members of a joint venture (the "Tikrit Consortium"), to construct a medical rehabilitation center in Tikrit, Iraq.*fn1 The parties entered into a construction contract in January 1981, pursuant to which plaintiffs were to receive 19,739,831.730 Iraqi dinars ("I.D.")*fn2 in exchange for constructing the rehabilitation facility and operating it for 18 months.*fn3 A portion of the money due under the contract was to be paid in a lump sum in advance of performance, with the remainder to be paid in monthly progress payments and a final payment upon completion of the project. Payment was to be made in several different currencies, as follows: (1) 25 percent in Iraqi dinars, (2) 30 percent in U.S. dollars, (3) 15 percent in Japanese yen, and (4) 30 percent in Swiss francs, with all non-Iraqi currencies to be to be transferred outside Iraq at the then-prevailing exchange rates.*fn4

Around the same time, plaintiffs entered into another joint venture (the "Hilla Consortium") for purposes of bidding on a contract to build a sewerage network in Hilla, Iraq.*fn5 The bid was accepted by the Ministry of Local Government in February 1981 and, in March 1981, the parties entered into a construction contract.*fn6 Under the contract, the Hilla Consortium was to receive I.D. 10,629,381.423 in exchange for constructing the sewerage network and maintaining it for 12 months.*fn7 Like the Tikrit contract, the Hilla contract was payable in an advance lump sum, monthly progress payments, and a final payment due upon completion with a significant portion of the price payable in foreign hard currency. In this case, 70 percent of the contract price was to be paid in U.S. dollars.*fn8

The Tikrit and Hilla Finance Agreements

Prior to execution of the Tikrit and Hilla contracts, war commenced between Iraq and Iran.*fn9 The war caused unforeseen delays of both construction projects*fn10 and disruptions to Iraq's economy that resulted in Iraq's failure to make progress payments due under both the Tikrit and Hilla contracts.*fn11 Because Iraq did not honor its payment obligations and defaulted on the construction contracts, the Tikrit and Hilla Consortia entered into finance agreements in lieu of the remaining hard currency payments owed to them.

The Hilla finance agreement, executed in December 1983, called for six promissory notes to be issued to the Hilla Consortium for principal amounts of $458,451.29, $515,202.68, $252,659.41, $137,853.15, $386,374.45, and $151,244.51.*fn12 The notes specified that payment would be made to the National Bank of Kuwait in Kuwait and that interest was payable every six months.*fn13 The six notes, which were issued between February 1985 and April 1986, each were guaranteed by Rafidain.*fn14

The Tikrit finance agreement was executed in January 1987*fn15 and called for the issuance of four promissory notes. The notes, which required interest to be paid every six months, were issued in the amounts of $400,000, 614,799 Swiss francs, 30,639,999 Japanese yen, and 30,639,999 Japanese yen,*fn16 and were made payable in "Kuwait or any other place the beneficiary chooses."*fn17 Like the Hilla notes, the Tikrit notes were guaranteed by Rafidain.*fn18

As the Tikrit and Hilla notes came due, the parties agreed to extend their maturities contingent upon the continued payment of interest.*fn19 Interest payments were timely made until Iraq's invasion of Kuwait in August 1990,*fn20 when defendants ceased making payments to plaintiffs. Since then, neither interest payments nor the principal amounts due and payable on the notes have been paid. Rafidian, as guarantor of the notes, became liable for the amounts due under them no later than the Ministries' respective defaults, but Rafidain also has failed to make payments to plaintiffs since Iraq's invasion of Kuwait. Plaintiffs here sue Rafidain on the guarantees.*fn21

Discussion

Prior Proceedings

None of the defendants answered the original complaint or otherwise appeared. The Court granted plaintiffs' motion for default judgment on January 6, 1998 and referred the matter to a magistrate judge for an inquest.

Prior to final determination of damages and the entry of judgment, defendant Rafidain moved to vacate the default judgment and dismiss the action against it for lack of subject matter and in personam jurisdiction. Plaintiffs and Rafidain then stipulated to the filing of an amended complaint and an amended motion to dismiss, both of which were duly filed. Plaintiffs consented to a vacatur of the order granting the motion for default judgment against Rafidain, and the Court now considers Rafidain's motions to dismiss this action as to Rafidain on the grounds that the Court lacks subject matter and personal jurisdiction and that the amended complaint fails to state a claim upon which relief may be granted against Rafidain.

Subject Matter Jurisdiction

Traditionally, foreign states have enjoyed broad sovereign immunity from suit in United States courts. In recent times, however, increased contacts between American citizens and foreign states and their instrumentalities have resulted in a greater need for access to judicial fora to resolve disputes arising from such interactions.*fn22 In 1976, Congress passed the Foreign Sovereign Immunities Act ("FSIA")*fn23 in response to this need. Designed to insure that the principle of sovereign immunity is applied uniformly and with minimal adverse consequences to U.S. foreign policy,*fn24 the FSIA does primarily two things: (1) it provides comprehensive standards governing access to the federal and state courts for plaintiffs asserting claims against foreign states and their instrumentalities,*fn25 and (2) it grants federal district courts original jurisdiction over any civil claims against a foreign state for which there is no immunity under the Act*fn26 and gives foreign states the right to remove any such action brought in a state court to federal district court.*fn27 The FSIA now is the sole basis for obtaining subject matter jurisdiction over a foreign state, its agencies, or its instrumentalities.*fn28 Under the FSIA a foreign state is immune from jurisdiction in the United States absent an express waiver of immunity or an applicable statutory exception.*fn29 Where there is no immunity, the federal district courts have subject matter jurisdiction and, if service of process is made in accordance with the FSIA, there is personal jurisdiction over the foreign defendant.*fn30

In this case, plaintiffs both are Kuwaiti companies, Iraq is a foreign state, and the Ministries and Rafidain each are agencies or instrumentalities of Iraq. Thus, the FSIA clearly applies to this action. Since Rafidain has not waived its immunity, plaintiffs' access to this Court depends on whether one of the statutory exceptions applies.*fn31 Probably the most significant of these exceptions, and the only one that plaintiffs seek to invoke, covers cases involving commercial activities of a foreign state that either take place or have a direct effect in the United States.*fn32 If plaintiffs can prove that this exception applies and that Rafidain was served properly, this Court has subject matter as well as personal jurisdiction over Rafidain.*fn33

Exceptions to Immunity Under § 1605(a)(2)

The language of Section 1605(a)(2) is precise and should be construed narrowly.*fn34 It provides:

"A foreign state or its instrumentalities shall not be immune from the jurisdiction of courts of the United States ...

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