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Falcoal, Inc., Plaintiff, v. Turkiye Komur Isletmeleri Kurumu, Defendant


660 F. Supp. 1536May 27, 1987, Decided

OPINION Pending before this Court is Defendant’s Motion to Dismiss. Having considered that motion, the submissions of the parties, the argument of counsel, and the applicable law, the Court is of the opinion that Defendant’s Motion should be granted.

Factual Background

Plaintiff Falcoal, Inc., formerly P & O Falcoal, Inc. (Falcoal) is an American corporation having its principal place of business in Houston, Texas. Defendant Turkiye Komur Isletmeleri Kurumu (TKI) is a commercial entity, owned and controlled by the Turkish government. One of the functions of TKI is to provide for Turkey’s energy requirements.

Until 1984, TKI apparently obtained 100 percent of the coal utilized by Turkey from Turkish miners and suppliers. In 1984, however, TKI decided to import a portion of Turkey’s coal supply. In an attempt to solicit bids, TKI issued a notice announcing a “sartname” (“terms and conditions”). This announcement was made in local Turkish-language publications. Falcoal was one of the firms that responded by asking for a copy of the sartname. The sartname distributed by TKI was issued in Turkish and provided by its terms that any conflicts as to its terms would be settled by reference to the original Turkish language version.

Falcoal submitted the bid that was ultimately accepted by TKI. Falcoal’s bid was signed and submitted by its authorized agent, Zihni Dis Ticaret Ve Pazarlama A.S. (Zihni), a Turkish company.

The negotiation of the contract took place entirely in Ankara, Turkey. Falcoal officials came to Ankara for the negotiations. All negotiations were conducted in Turkish, with Zihni negotiating for Falcoal.

After the parties had agreed to the terms, Zihni prepared two copies of the contract, an English version and a Turkish version. Both versions were signed by TKI and Falcoal in Ankara. Although the parties assert that they believed the content of the two versions to be identical, the English contract and the Turkish contract contain forum selection clauses which directly contradict each other. The Turkish-language version provides:

In the case of any dispute between  SUPPLIER and PURCHASER arising out of the application or interpretation of the articles of the Agreement, not being settled amicably between the parties, the final jurisdiction for the settlement of such disputes, in the case of the PURCHASER [TKI] submitting a claim, lies within the jurisdiction of the Houston commercial courts and, in the case of the SUPPLIER [Falcoal] submitting a claim lies within the jurisdiction of the Ankara commercial courts.

The English-language contract, by contrast, provides that any dispute

shall be finally settled in Houston and submitted to the jurisdiction of the Courts of the U.S.A. if the claim is put forward by Supplier [Falcoal] and in Ankara, Turkey, and submitted to the Turkish Courts if the claim is put forward by Buyer [TKI].

Pursuant to the contract, Falcoal was to deliver 100,000 tons of coal to a shipper of TKI’s choice. Falcoal agreed to post a performance bond in an amount equal to 10 percent of the contract price and, pursuant to this agreement, Citibank International-Ankara issued a performance bond in favor of TKI in the amount of $ 400,000. This bond was secured by a letter of credit opened by Falcoal at Citibank International-Dallas.

The contract further provided that, to secure payment for the coal, TKI was to open a letter of credit in New York forty-five days before shipment. TKI failed to open this letter of credit. When the coal was not shipped, TKI, allegedly wrongfully and without authorization, drew on Falcoal’s performance bond. Falcoal subsequently brought this suit against TKI alleging breach of contract for failing to open the New York letter of credit in Falcoal’s favor, conversion and fraud for wrongfully drawing on Falcoal’s performance bond, and injury to Falcoal’s business reputation. TKI has moved to dismiss, alleging lack of subject matter jurisdiction, lack of personal jurisdiction, and improper venue.

Subject Matter Jurisdiction

TKI asserts that this Court lacks subject matter jurisdiction because TKI, as an entity of the Turkish government, has sovereign immunity. Falcoal admits that TKI is a governmental entity and thus subject to the Foreign Sovereign Immunities Act of 1976. However, Falcoal contends that TKI falls within the exceptions to sovereign immunity set forth in the FSIA.

Falcoal maintains that the following provisions of section 1605 are pertinent:

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case —

(1) in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver;

(2) in which the action is based upon a commercial activity carried on in the United States by the foreign State; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or 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;

Falcoal contends that TKI has implicitly waived sovereign immunity by consenting, through the forum selection clauses, to the jurisdiction of the Houston courts. In support of this position, Falcoal cites a number of cases in which it has been held that an agreement to arbitrate in the United States waives sovereign immunity in the United States. Falcoal argues that, by analogy, a forum clause providing for suit in the United States should be read as an implicit waiver of sovereign immunity.

This Court would find merit to Falcoal’s argument, were the English version forum clause the only clause at issue. However, the Court cannot ignore the existence of the Turkish contract, whose forum clause provides for suit in Houston only should TKI choose to sue. That contract expressly provides for suit against TKI in Turkey. TKI, moreover, contends that the Turkish version is the valid version and that, in fact, to enforce the English-language copy would force TKI to violate Turkish law, which requires all foreign entities to use the Turkish language in their contracts with Turkish companies. Clearly, under the facts of this case where, as here, there are two contradictory forum clauses and where the issue of which forum clause should control is vigorously contested, the English-language clause cannot be said to constitute a waiver of sovereign immunity.

The Court next reviews Falcoal’s argument that TKI’s actions place it within the exceptions to sovereign immunity.

Falcoal cannot seriously contend that TKI’s activities place it within the first of these exceptions. Clearly this action is not one “based upon commercial activity carried on [by TKI] in the United States.” The FSIA defines such commercial activity as activity “having substantial contact with the United States.” The only act of TKI which might possibly be construed as being “in the United States” is the contractual agreement to open a letter of credit in New York and the subsequent failure to do so. The mere provision for payment in the United States, however, is not a “substantial contact” meeting the test for commercial activity under the FSIA. Likewise, this action does not fall within the second exception since it is not based “upon an act performed in the United States in connection with a commercial activity of [TKI] . . . elsewhere.” Again, the only conceivable act by TKI in the United States is its failure to open a letter of credit in New York. This failure to act cannot constitute an “act performed in the United States” by TKI. It remains for this Court to determine whether the conduct alleged against TKI constitutes “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere” which “causes a direct effect in the United States.” At issue is the definition of “direct effect.”

The conduct complained of in this action is TKI’s drawing upon the performance bond allegedly wrongfully and without authorization. The effect this action had in the United States was a financial effect to Falcoal, a United States corporation. It is clear that, under certain circumstances, a purely financial effect does not suffice as a “direct effect” for purposes of negating sovereign immunity. For example, the commission of a tort by a foreign sovereign on its own soil physically injuring an American citizen does not constitute a “direct effect” in the United States simply because the American citizen is financially injured. However, “unlike a natural person, a corporate entity is intangible; it cannot be burned or crushed. It can only suffer financial loss.”

The Court holds that the conduct of TKI in drawing on Falcoal’s performance bond was an action which caused a direct effect in the United States, and thus TKI cannot claim sovereign immunity from this suit. Subject matter jurisdiction, therefore, exists.

Personal Jurisdiction

Because TKI lacks sovereign immunity in this action, and because neither party contends that service was not properly accomplished, statutory in personam jurisdiction over TKI has been established. As the above discussion indicates, however, there has been no showing of the minimum contacts by TKI with the United States necessary to satisfy the due process requirements of the Constitution. Constitutionally, therefore, this Court cannot exercise personal jurisdiction over TKI unless TKI has taken some action which may be construed as an expression of waiver or implied consent to the exercise of such jurisdiction.

Falcoal contends that such an implied consent is found in the forum selection clause of the English version contract. This Court could find waiver, however, only if it were found that the Turkish-language clause is unenforceable and the English version valid. Falcoal urges the Court to do so because of “fraud, overreaching, undue influence or overweening bargaining power” on the part of TKI. Falcoal argues that TKI acted fraudulently in concealing the true content of the Turkish contract from Falcoal. This Court might find Falcoal’s position convincing had Falcoal alone participated in the contract negotiations. However, Falcoal was represented by a Turkish agent who prepared both contracts. If Falcoal was in fact duped as to the contents of the Turkish contract, its allegations of fraud would appropriately be asserted against its agent, Zihni. In the absence of any evidence of collusion between Zihni and TKI, this Court cannot find the Turkish-language version of the contract unenforceable by TKI because of fraud. Similarly, because both parties are presumably sophisticated in business matters and because Falcoal was represented by an agent fully conversant in the Turkish language, the Court is unable to find overreaching or and unequal bargaining power on the part of TKI.

The Court thus faced with the existence of two contradictory clauses, must look to the law of the appropriate forum to determine which clause to enforce. Because the contract was solicited, negotiated and executed in Turkey, Turkish law must apply.

Pursuant to the Turkish contract, Falcoal’s suit must be pursued in Ankara. Thus TKI has not consented to be sued in Houston, and this Court lacks in personam jurisdiction over TKI.


Although this Court finds that TKI has been divested of its sovereign immunity to this suit by its actions in Turkey having a direct effect in the United States and, thus, subject matter jurisdiction exists, the Court finds that it lacks in personam jurisdiction over TKI.

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