The Commercial Activity Exception
Most commercial claims against a foreign government stand or fall on one subsection. It contains three separate routes, each with its own connection to the United States, and choosing the wrong one is a common way to lose a case that had a good one available.
The rule in short
A foreign state loses immunity where the action is based upon commercial activity carried on in the United States, upon an act performed here in connection with commercial activity elsewhere, or upon an act outside the United States in connection with commercial activity elsewhere that causes a direct effect here. Commercial character is determined by the nature of the conduct rather than its purpose, following the market-player test in Weltover.
The commercial activity exception is the provision that makes ordinary business litigation against a foreign government possible. It rests on a simple idea with a complicated text: a state that steps into the market should be answerable like anyone else in it, and a state exercising powers only governments have should not.
Three clauses, three connections
The subsection removes immunity in three situations. Where the action is based upon commercial activity carried on in the United States by the foreign state. Where it is based upon an act performed in the United States in connection with commercial activity of the state elsewhere. And where it is based upon an act outside the United States in connection with commercial activity elsewhere, and that act causes a direct effect in the United States.
The clauses are alternatives and each carries a different territorial requirement. A plaintiff should identify which one it relies on and plead to it. Cases are regularly lost because the complaint gestures at commerce generally without establishing the particular connection the chosen clause demands.
What makes an activity commercial
The definition says commercial activity means a regular course of commercial conduct or a particular commercial transaction or act, and that commercial character is determined by reference to the nature of the conduct rather than its purpose. The purpose exclusion is deliberate. A state buying uniforms for its army is engaged in commerce even though the object is national defense.
The Supreme Court gave the test its working form in Weltover. A state engages in commercial activity when it acts not as a regulator of a market but in the manner of a private player within it, exercising powers that can also be exercised by private citizens. Issuing bonds, borrowing, chartering, purchasing and employing are commercial. Expropriating, taxing, licensing and expelling are not.
What based upon means
The phrase is a limit, not a connector. The Supreme Court held in Nelson that an action is based upon the elements of a claim that, if proven, would entitle the plaintiff to relief, and later described the inquiry in Sachs as identifying the gravamen of the suit. A commercial act somewhere in the background does not make the claim commercial.
The distinction decides real cases. Where a plaintiff was recruited abroad under an ordinary employment contract but sues over an alleged detention by state security, the gravamen is the sovereign conduct and immunity holds, even though the employment relationship was plainly commercial. The question is what the suit is really about.
Claims are often pleaded against a ministry when the commercial conduct was carried out by a state-owned company, or against the company when the act complained of was the ministry's. Because immunity is decided against each defendant, and instrumentalities are presumed to have a separate juridical status, a misdirected claim can fail even though a well-directed one would have succeeded on the same facts. The corporate structure should be established before the complaint is drafted.
| Clause | Where the conduct occurs | Required connection | Typical case |
|---|---|---|---|
| First | Commercial activity carried on in the United States | Substantial contact with the United States | A state agency operating an office or business here |
| Second | An act performed in the United States | Connection to commercial activity elsewhere | A signature, payment or misrepresentation made here |
| Third | An act outside the United States | A direct effect in the United States | Non-payment where payment was due here |
| None applicable | Sovereign conduct anywhere | No exception available on this ground | Regulation, expropriation, expulsion |
Substantial contact and direct effect
The first clause carries its own gloss: commercial activity carried on in the United States means activity having substantial contact with the United States. That is more than the minimum contacts standard applied to private defendants under personal jurisdiction over a foreign defendant. Isolated purchases or a single visit have generally not sufficed.
The third clause turns on direct effect. Weltover held that an effect is direct if it follows as an immediate consequence of the defendant's activity, and rejected any additional requirement that it be substantial or foreseeable. Where the parties fixed a place of payment in the United States, failure to pay there produces a direct effect. Where the only link is that the plaintiff is domiciled here and felt the loss, courts have usually said the effect is derivative rather than direct.
What follows if the exception applies
Loss of immunity puts the foreign state in the position of a private party. It is liable in the same manner and to the same extent as a private individual in like circumstances, except that it is not liable for punitive damages. The case is tried without a jury, and ordinary discovery obligations attach, with the complications described in discovery from a foreign party in a United States case.
Two limits survive. The state may still argue that the case belongs elsewhere, which is the subject of forum objections and parallel proceedings abroad. And a judgment does not carry a right to seize property: attachment and execution are governed by their own provisions, as noted in suing a foreign state and in enforcing a judgment once it is recognized.
Points to carry away
- The exception contains three clauses, each with a different connection to the United States.
- Commercial character is judged by the nature of the conduct, not by its public purpose.
- A state acts commercially when it acts as a private player within the market.
- Based upon points to the gravamen of the suit, not to any incidental element.
- The first clause requires the activity to have substantial contact with the United States.
- A direct effect must follow as an immediate consequence of the state's activity.
Questions readers ask
Is a government contract always commercial activity?
Not always, and the question is what the contract required rather than who signed it. A contract to buy boots, charter a vessel or borrow money is the kind of transaction a private party could make, so it is commercial regardless of the army or the treasury it served. A contract that could only be performed by exercising sovereign power, such as granting a license to operate, regulating an industry, or expelling a person, is not commercial even where money changes hands under it.
What counts as an immediate consequence in the United States?
An effect that follows from the state's conduct without an intervening element, and the Supreme Court has rejected any requirement that the effect be substantial or foreseeable. The clearest case is a payment obligation the parties fixed in the United States: when the state fails to pay where it agreed to pay, the effect lands here directly. Financial loss suffered by a domestic plaintiff simply because it is domiciled here, with no connection tying the transaction to this country, has generally been held insufficient.
Can a claim be split so part of it survives?
Yes, and it often is. Immunity is decided claim by claim, so a complaint may proceed on a contract count while a related count grounded in a regulatory or expropriatory act is dismissed. Courts look at the gravamen of each claim separately rather than characterizing the case as a whole. Pleading practice follows from that: separating the commercial and sovereign strands into distinct counts makes the surviving theory easier to identify and harder to lose along with the rest.
Sources
- Cornell Legal Information Institute — 28 U.S.C. 1605, General Exceptions to Jurisdictional ImmunitySubsection (a)(2) sets out the three clauses of the commercial activity exception.
- Cornell Legal Information Institute — 28 U.S.C. 1603, DefinitionsCommercial activity is defined by nature rather than purpose, with a substantial contact test.
- Cornell Legal Information Institute — 28 U.S.C. 1604, Immunity of a Foreign State From JurisdictionThe default immunity the exception operates against.
- Cornell Legal Information Institute — 28 U.S.C. 1330, Actions Against Foreign StatesJurisdiction turns on the absence of immunity, so the exception is a jurisdictional question.
- Cornell Legal Information Institute — 28 U.S.C. 1606, Extent of LiabilityA non-immune foreign state is liable as a private individual, but not for punitive damages.
- Cornell Legal Information Institute — 28 U.S.C. 1610, Exceptions to the Immunity From Attachment or ExecutionProperty used for commercial activity is the category most often available to a creditor.
Liberty Law Library is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
More in Cross-Border Litigation
Suing a Foreign State: Immunity as the Default
The Foreign Sovereign Immunities Act makes a foreign state immune from the jurisdiction of federal and state courts except as the statute itself provides, and it is the sole basis for obtaining jurisdiction over a foreign state. A foreign state includes its political subdivisions and its agencies and instrumentalities. Exceptions cover waiver, commercial activity, certain expropriations, property in the United States, some domestic torts, and arbitration.
Forum Objections and Parallel Proceedings Abroad
Forum non conveniens permits a court with jurisdiction to dismiss where an adequate alternative forum exists and the balance of private and public interest factors strongly favors trial there. An alternative forum is adequate where the defendant is amenable to process and the remedy is not so unsatisfactory as to be no remedy at all. A foreign plaintiff's choice of forum receives less deference than a domestic plaintiff's.
Enforcing a Judgment Once It Is Recognized
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