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In reviewing decision favoring Canadian instrumentality that breached contract with U.S. company, D.C. Circuit reverses, holding under Foreign Sovereign Immunities Act, lack of intervening event provides "direct effect" of breach sufficient to allow jurisdiction.

In 2008 Cruise Connections (CC), a U.S. corporation based in Winston-Salem, N.C., signed a contract with the Royal Canadian Mounted Police (RCMP) under which CC would dock in Vancouver three cruise ships that RCMP would use to house security staff during the 2010 Olympic Winter Games. The contract required CC to subcontract with two U.S.-based cruise lines, Holland America and Royal Caribbean, to provide the necessary ships. For this service, RCMP contracted to pay CC just over $54 million (Canadian).

CC then entered into "Charter Party Agreements" with Holland America and Royal Caribbean to provide three ships for approximately $39 million (U.S.). Because the ships would remain in Vancouver for several weeks, the two companies demanded assurances that they would incur no liability for Canadian corporate income and payroll taxes. Although it originally gave such assurances, RCMP later disavowed responsibility with regard to the taxes just as the two subcontractors were about to sign the Charter Party Agreements with CC.

The cruise lines balked, leaving CC unable to deliver signed Charter Party Agreements by the required date. When RCMP terminated the contract with CC, the corporation sued RCMP in U.S. District Court for the District of Columbia alleging breach of contract and unfair trade practices.

Under the Foreign Sovereign Immunities Act (FSIA), RCMP, as an "agency or instrumentality" of Canada, generally would enjoy sovereign immunity from suit, unless that immunity is abrogated by the Act's Commercial Activities exception, which applies "in any case ... in which the action is based ... upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States" (italics added). Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. [section] [section] 1602-11, Id. [section] 1605(a)(2). CC argued that this exception applied. RCMP, in turn, argued that the alleged breach had "no direct effect in the United States" and moved to dismiss for lack of jurisdiction.

CC responded with two arguments contending RCMP's actions caused two direct effects in the U.S. First, the contract required RCMP to pay via wire transfer to a U.S. bank and RCMP's failure to pay qualified as a direct effect in the U.S. Second, RCMP's cancellation caused a direct effect in the U.S. because it resulted in the loss of U.S. business to CC and the cruise lines.

The district court rejected both arguments. It held that RCMP's failure to pay did not constitute a direct effect because the parties had never agreed that RCMP would pay in the U.S. As to the loss of business, the court held that CC's inability to perform its contractual obligations to the third parties constituted an intervening element between RCMP's breach and the broken third-party agreements, thus obviating RCMP's liability.

The U.S. Court of Appeals, D.C. Circuit, reversed and remanded, holding that RCMP's termination of contract had a direct effect in the U.S. On appeal, CC reiterated the arguments it had made in district court--that "any one of the losses caused by the termination of its contract with RCMP ... qualifies as a direct effect in the United States." The Court addressed only the two alleged direct effects in the U.S. that RCMP challenged: the lost profit from onboard revenues and the lost travel agency fee, both of which RCMP argued were "too attenuated or remote to amount to a 'direct effect.'" [664]

As might be expected, the appeal turned on the question of what constitutes a direct effect under the FSIA. Quoting Upton v. Empire of Iran, 459 F.Supp. 264, 266 (D.D.C.1978), the Court notes that a direct effect is "one which has no intervening element, but, rather, flows in a straight line without deviation or interruption." [664] It then declines to decide the first issue--the nonpayment of onboard revenues, which did present the possibility of an intervening effect--in favor of the second issue, where "no intervening event stood between RCMP's termination of the contract and the lost revenues from the travel agency contract and the Charter Party Agreements." [664] The travel agency agreement was a done deal, the Court explained:

"CC would have received a flat fee no matter how many passengers the travel agency booked. Likewise, 'all that remained for the [Charter Party Agreements] to be formally consummated was for the cruise lines to sign the agreements once RCMP confirmed its contractual responsibility for Canadian taxes.' Appellants' Br. 40. In both instances, then, RCMP's termination of the CC contract led inexorably to the loss of revenues under the third-party agreements. This is sufficient. As the Supreme Court explained in Republic of Argentina v. Weltover, an effect qualifies as direct 'if it follows as an immediate consequence of the defendant's ... activity.' 504 U.S. 607, 618, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992) (internal quotation marks omitted). In Weltover, the Court concluded that Argentina's unilateral extension of bonds held by foreign creditors caused a direct effect in the United States because as a consequence of Argentina's breach, '[m]oney that was supposed to have been delivered to a New York bank for deposit was not forthcoming.' Id. at 619, 112 S.Ct. 2160. So too here. Because RCMP terminated the contract, revenues that would otherwise have been generated in the United States were 'not forthcoming.'"

RCMP resisted this conclusion, arguing that it never agreed to any "single aspect of the underlying transaction that...[would] take place in the United States." But the Court stated that under the FSIA, all that was needed was that the effect be "direct"; the foreign sovereign need not agree that the effect would occur (inviting comparison with Weltover, 504 U.S. at 618, 112 S.Ct. 2160). The Court noted that in the present case, the contract itself required the ships to come from Holland America and Royal Caribbean cruise lines, "and record evidence makes clear that both are U.S.-based companies-Holland America in Seattle and Royal Caribbean in Miami."

RCMP then tried to argue that harm to a U.S. citizen, in and of itself, cannot satisfy the 'direct effect' requirement. But the Court notes that although that was true, the cases RCMP relied on involved situations in which the plaintiff's U.S. citizenship was the only connection to the U.S., with all activities covered by the contract occurring outside the U.S. By contrast, the Court states, CC relied on far more than its U.S. citizenship; all of its efforts to negotiate the Charter Party Agreements occurred in the U.S.: "at least one of the ships would have moved through U.S. waters to Vancouver; the termination of the contract thwarted over $40 million (U.S.) worth of cruise-related business in the United States; and the travel agency agreement was negotiated in and called for performance in the United States." [665]

To RCMP's argument that the termination of the Charter Party Agreements did not constitute a direct effect because it did not harm CC, the Court replied that nothing in the FSIA requires that the direct effect harm the plaintiff, only that the direct effect occur in the U.S., caused by a foreign government's act outside the U.S. And, as the Court noted, "Perhaps CC has suffered less harm than it claims, but that issue relates to the merits of its case, not the jurisdictional question we face here."

CITATION: Cruise Connections Charter Management 1, LP v. Attorney General of Canada, 600 F.3d 661 (D.C. Cir. 2010).
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Publication:International Law Update
Geographic Code:1CANA
Date:Apr 1, 2011
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