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Texas Trading & Milling Corp. v. Federal Republic of Nigeria and Central Bank of Nigeria

decided: April 16, 1981.

TEXAS TRADING & MILLING CORP., PLAINTIFF-APPELLANT,
v.
FEDERAL REPUBLIC OF NIGERIA AND CENTRAL BANK OF NIGERIA, DEFENDANTS-APPELLEES ; DECOR BY NIKKEI INTERNATIONAL, INC., D/B/A NIKKEI INTERNATIONAL, INC., PLAINTIFF-APPELLEE-CROSS-APPELLANT, V. FEDERAL REPUBLIC OF NIGERIA AND CENTRAL BANK OF NIGERIA, DEFENDANTS-APPELLANTS-CROSS-APPELLEES ; CHENAX MAJESTY, INC., PLAINTIFF-APPELLANT-CROSS-APPELLEE, V. FEDERAL REPUBLIC OF NIGERIA AND CENTRAL BANK OF NIGERIA, DEFENDANTS-APPELLEES-CROSS-APPELLANTS ; EAST EUROPE IMPORT-EXPORT, INC., PLAINTIFF-APPELLEE-CROSS-APPELLANT, V. FEDERAL REPUBLIC OF NIGERIA AND CENTRAL BANK OF NIGERIA, DEFENDANTS-APPELLANTS-CROSS-APPELLEES .



Appeal from an order of the United States District Court for the Southern District of New York, John M. Cannella, Judge, and appeals and cross-appeals from three final judgments of that court, Lawrence W. Pierce, Judge, presenting issues under the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. ยงยง 1330, 1602-1611. The order of Judge Cannella is reversed and the case is remanded. The judgments entered on orders of Judge Pierce are affirmed.

Before Kaufman and Timbers, Circuit Judges, and Ward, District Judge.*fn*

Author: Kaufman

These four appeals grow out of one of the most enormous commercial disputes in history, and present questions which strike to the very heart of the modern international economic order. An African nation, developing at breakneck speed by virtue of huge exports of high-grade oil, contracted to buy huge quantities of Portland cement, a commodity crucial to the construction of its infrastructure. It overbought, and the country's docks and harbors became clogged with ships waiting to unload. Imports of other goods ground to a halt. More vessels carrying cement arrived daily; still others were steaming toward the port. Unable to accept delivery of the cement it had bought, the nation repudiated its contracts. In response to suits brought by disgruntled suppliers, it now seeks to invoke an ancient maxim of sovereign immunity par in parem imperium non habet*fn1 to insulate itself from liability. But Latin phrases speak with a hoary simplicity inappropriate to the modern financial world. For the ruling principles here, we must look instead to a new and vaguely-worded statute, the Foreign Sovereign Immunities Act of 1976 ("FSIA" or "Act")*fn2 a law described by its draftsmen as providing only "very modest guidance" on issues of preeminent importance.*fn3 For answers to those most difficult questions, the authors of the law "decided to put (their) faith in the U.S. courts."*fn4 Guided by reason, precedent, and equity, we have attempted to give form and substance to the legislative intent. Accordingly, we find that the defense of sovereign immunity is not available in any of these four cases.*fn5

I.

The facts of the four appeals are remarkably parallel, and can be stated in somewhat consolidated form.*fn6 Early in 1975, the Federal Military Government of the Federal Republic of Nigeria ("Nigeria") embarked on an ambitious program to purchase immense amounts of cement. We have already had occasion in another case to call the program "incredible," see National American Corp. v. Federal Republic of Nigeria, 597 F.2d 314, 316 (2d Cir. 1979), but the statistics speak for themselves. Nigeria executed 109 contracts, with 68 suppliers. It purchased, in all, over sixteen million metric tons of cement. The price was close to one billion dollars.

A.

Four of the 109 contracts were made with American companies that were plaintiffs below in the cases now before us: Texas Trading & Milling Corp. ("Texas Trading"), Decor by Nikkei International, Inc. ("Nikkei"), East Europe Import-Export, Inc. ("East Europe"), and Chenax Majesty, Inc. ("Chenax"). The four plaintiffs are not industrial corporations; they are, instead, "trading companies," which buy from one person and sell to another in hopes of making a profit on the differential. Each of the plaintiffs is a New York corporation.

The contracts at issue were signed early in 1975. Each is substantially similar; indeed, Nigeria seems to have mimeographed them in blank, and filled in details with individual suppliers. Overall, each contract called for the sale by the supplier to Nigeria of 240,000 metric tons of Portland cement.*fn7 Specifically, the contracts required Nigeria, within a time certain after execution,*fn8 to establish in the seller's favor "an Irrevocable, Transferable abroad, Divisible and Confirmed letter of credit" for the total amount due under the particular contract, slightly over $14 million in each case.*fn9 The contract also named the bank through which the letter of credit was to be made payable. Nikkei and East Europe named First National City Bank in New York, and Texas Trading specified Fidelity International Bank, also in New York. Chenax denominated Schroeder, Muenchmeyer, Hengst & Co. of Hamburg, West Germany. Drafts under the letters of credit were to be "payable at sight, on presentation" of certain documents to the specified bank.

Within a time certain after establishment and receipt of the letter of credit,*fn10 each seller was to start shipping cement to Nigeria. The cement was to be bagged, and was to meet certain chemical specifications. Shipments were to be from ports named in the contracts, mostly Spanish, and were to proceed at approximately 20,000 tons per month. Delivery was to the port of Lagos/Apapa, Nigeria, and the seller was obligated to insure the freight to the Nigerian quay. Each contract also provided for demurrage.*fn11 The Nikkei and East Europe contracts provided they were to be governed by the laws of the United States. The Chenax contract specified the law of Switzerland, and the Texas Trading contract named the law of Nigeria.

In short, performance under the contracts was to proceed as follows. Nigeria was to establish letters of credit. The suppliers were to ship cement. Each time a supplier had loaded a ship and insured its cargo to Lagos/Apapa, the supplier could take documents so proving to the bank named in the contract and, "at sight," be paid for the amount of cement it shipped. The ship might sink on the way to Nigeria, or it might never leave the Spanish port at all, but on presentation of proper documents showing a loaded ship and an insured cargo the supplier had a right to be paid. Demurrage was to operate in the same manner: if a ship was detained in Nigerian waters, the supplier would receive certain documents. It could present the documents to the bank, and receive payment.

The actual financial arrangements differed from those set forth in the cement contracts. Instead of establishing "confirmed" letters of credit with the banks named, Nigeria established what it called "irrevocable" letters of credit with the Central Bank of Nigeria ("Central Bank"), an instrumentality of the Nigerian government,*fn12 and advised those letters of credit through the Morgan Guaranty Trust Company ("Morgan") of New York. That is, under the letters of credit as established, each seller was to present appropriate documents not to the named bank, but to Morgan. And, since the letters were not "confirmed," Morgan did not promise to pay "on sight"; it assumed no independent liability.*fn13 Each of the letters of credit provided it was to be governed by the Uniform Customs and Practice for Documentary Credits ("UCP") (1962 Revision), as set forth in Brochure No. 222 of the International Chamber of Commerce.

Nigeria's choice of Morgan as the bank to which suppliers presented documents and from which suppliers secured payments came in the course of a longstanding relationship between Nigeria and Morgan. Central Bank used Morgan as its correspondent bank in the United States, and Morgan conducted myriad transactions on Nigeria's behalf. Employees of Central Bank regularly came to Morgan for training seminars. On Nigeria's request, Morgan made payments to Nigerian students in the United States, to American corporations to which Nigeria owed money, and to the Nigerian embassy and consulates in the United States. Indeed, Nigeria used Morgan to make payments (for salaries, operating expenses, and the like) to Nigerian embassies in other countries as well. Until 1974, Morgan had the right to draw up to $1 million per day from Nigeria's account at the Federal Reserve Bank of New York to satisfy Nigeria's obligations. Nigeria raised the limit to $3 million per day in 1974, and Morgan enjoyed unlimited drawing rights on Nigeria's funds beginning in November 1975. Central Bank kept over $200 million of securities in a custody account at Morgan. Morgan advised as much as $200 million in letters of credit established by Nigeria, and confirmed, in addition, letters of credit totalling at least $70 million more.

After receiving notice that the letters of credit had been established, the suppliers set out to secure subcontracts to procure the cement, and shipping contracts to transport it.*fn14 They, through their subcontractors, began to bag the cement and load it on ships, as suppliers across the globe were doing the same. Hundreds of ships arrived in Lagos/Apapa in the summer of 1975, and most were carrying cement. Nigeria's port facilities could accept only one to five million tons of cement per year; at any rate, they could not begin to unload the over sixteen million tons Nigeria had slated for delivery in eighteen short months. Based on prior experience, Nigeria had made the contracts expecting only twenty percent of the suppliers to be able to perform. By July, when the harbor held over 400 ships waiting to unload 260 of them carrying cement Nigeria realized it had misjudged the market considerably.

C.

With demurrage piling up at astronomical rates, and suppliers, hiring, loading, and dispatching more ships daily, Nigeria decided to act. On August 9, 1975, Nigeria caused its Ports Authority to issue Government Notice No. 1434, a regulation which stated that, effective August 18, all ships destined for Lagos/Apapa would be required to convey to the Ports Authority, two months before sailing, certain information concerning their time of arrival in the port. The regulation also stated vaguely that the Ports Authority would "co-ordinate all sailing," and that it would "refus(e) service" to vessels which did not comply with the regulation. Then, on August 18, Nigeria cabled its suppliers and asked them to stop sending cement, and to cease loading or even chartering ships. In late September, Nigeria took the crucial step: Central Bank instructed Morgan not to pay under the letters of credit unless the supplier submitted in addition to the documents required by the letter of credit as written a statement from Central Bank that payment ought to be made. Morgan notified each supplier of Nigeria's instructions, and Morgan commenced refusing to make payment under the letters of credit as written. Almost three months later, on December 19, 1975, Nigeria promulgated Decree No. 40, a law prohibiting entry into a Nigerian port to any ship which had not secured two months' prior approval, and imposing criminal penalties for unauthorized entry.

Nigeria's unilateral alteration of the letters of credit took place on a scale previously unknown to international commerce. Officers of Morgan explained the potential consequences of Nigeria's action to representatives of Central Bank; Central Bank was adamant that Morgan not pay. After a meeting with Central Bank personnel, one Morgan officer stated that Central Bank's Deputy Governor "responded that the (Nigerian) Government was willing to go to court if we did pay." Within weeks of Nigeria's instructions to Morgan not to pay without the additional documentation, Morgan warned Central Bank in a telex: "We believe that there is an increasing possibility that litigation against you may be instituted in New York."

Nigeria's next step was to invite its suppliers to cancel the contracts. As part of the program, Nigeria convened a meeting at Morgan's offices in New York, to discuss Nigeria's position with members of the American financial community. Over forty suppliers eventually did settle. See National American Corp. v. Federal Republic of Nigeria, supra, 597 F.2d at 316. Nigeria asked Morgan to effect several of the settlement payments; some were for settling suppliers not located in the United States.

Cement suppliers who did not settle sued in courts all over the world.*fn15 The four suppliers at issue here Texas Trading, Nikkei, East Europe, and Chenax sued in the Southern District of New York. Named as defendants were both Nigeria and Central Bank. The complaints alleged that Central Bank's September instructions to Morgan, changing the terms of payment under the letters of credit, constituted anticipatory breaches of both the cement contracts (requiring Nigeria to establish "Irrevocable" letters of credit with certain terms of payment) and the letters of credit (requiring Central Bank to authorize payment when certain documents were presented to Morgan). Defendants do not seriously dispute that their actions constitute such anticipatory breaches;*fn16 their defenses go more to the propriety of jurisdiction under the FSIA. Judge Cannella in Texas Trading, D.C., 500 F. Supp. 320, found jurisdiction lacking; Judge Pierce in the consolidated Nikkei, East Europe, and Chenax actions, D.C., 497 F. Supp. 893, held it present. Judge Pierce proceeded to a trial on the merits, and awarded $1.857 million to Nikkei, $1.986 million to East Europe, and nothing to Chenax. These appeals followed.*fn17

II.

The law before us is complex and largely unconstrued, and has introduced sweeping changes in some areas of prior law. See House Judiciary Committee, Jurisdiction of United States Courts in Suits Against Foreign States, H.R.Rep. No. 1487, 94th Cong., 2d Sess. 7-8, reprinted in (1976) U.S.Code Cong. & Admin.News 6605, 6604-6 ("House Report ").*fn18 In structure, the FSIA is a marvel of compression. Within the bounds of a few tersely-worded sections, it purports to provide answers to three crucial questions in a suit against a foreign state: the availability of sovereign immunity as a defense, the presence of subject matter jurisdiction over the claim, and the propriety of personal jurisdiction over the defendant. See House Report at 6611-12. Through a series of intricately coordinated provisions, the FSIA seems at first glance to make the answer to one of the questions, subject matter jurisdiction, dispositive of all three. See Hearings on H.R. 11315 Before the Subcommittee on Administrative Law and Governmental Relations of the House Committee on the Judiciary, 94th Cong., 2d Sess. 28 (1976) ("1976 Hearings ") (testimony of Monroe Leigh, Legal Adviser, Department of State).*fn19 This economy of decision has come, however, at the price of considerable confusion in the district courts. In fact, Congress intended the sovereign immunity and subject matter jurisdiction decisions to remain ...


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