UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

CRUISE CONNECTIONS CHARTER : MANAGEMENT 1, LP, et al., : : Plaintiffs, : : v. : Civil Action No. 08-2054 (JR) : ATTORNEY GENERAL OF CANADA, et : al., : : Defendants. :

MEMORANDUM

The plaintiffs, the North Carolina limited partnership

Cruise Connections Charter Management and its general partner,

sued the Attorney General of Canada, the Royal Canadian Mounted

Police (RCMP), and Her Majesty the Queen for breach of contract

and violations of the North Carolina Unfair and Deceptive Trade

Practices Act. The defendants moved to dismiss for lack of

subject matter jurisdiction under the Foreign Sovereign

Immunities Act, or, in the alternative, pursuant to the doctrine

of forum non conveniens. After hearing argument on June 9, 2009,

I granted the defendants’ motion for reasons given in open court.

This memorandum explains that ruling in greater detail.1

Background

Although I must settle any contested jurisdictional

facts on a motion to dismiss for lack of subject matter

1 The plaintiffs have filed a notice of appeal, Dkt. 17, but that filing does not prohibit me from providing additional reasoning for my decision. jurisdiction, see Phoenix Consulting, Inc. v. Republic of Angola,

(D.C. Cir. 2000), the following alleged facts are

taken as true because they do not bear directly on the

jurisdictional issue.

The RCMP is in charge of coordinating security for the

2010 Winter Olympic Games, which will be held in Vancouver,

Canada. With space ashore limited, the RCMP decided to house

extra security personnel for the Games in ships berthed in

Vancouver Harbor. After soliciting bids, the RCMP selected

Cruise Connections to provide the necessary ships.

In July 2008, after the RCMP and Cruise Connections

reached agreement (the contract price was approximately $54

million Canadian), Cruise Connections, which had no ships of its

own, began negotiating charter party agreements (CPAs) with two

American cruise lines, Royal Caribbean International and Holland

America Line. The cruise lines sought assurance that the RCMP

was contractually obligated to pay any corporate or personal

taxes the ships might incur in Canada. When asked, two RCMP

representatives, Kelly Meikle and Michael Day, confirmed by email

that the RCMP was so obligated.

Satisfied, the cruise lines executed their CPAs with

Cruise Connections. Cruise Connections then turned to the task

of securing financing from the Royal Bank of Canada (RBC).

Before Cruise Connections could finalize the financing

- 2 - arrangements, however, the RCMP replaced Meikle and Day with a

new representative, Normande Morin. Morin reversed the RCMP’s

stated position and asserted that the cruise lines’ taxes were

not reimbursable. She also demanded that Cruise Connections put

up a 90% letter of credit -- an obligation that had been cut from

the final version of the contract. When Cruise Connections

refused to proceed under Morin’s terms, the RBC refused to

provide financing. Shortly thereafter, on November 17, 2008, the

RCMP terminated the contract, citing Cruise Connections’ breach

of its obligation to timely secure financing.

Analysis

The Foreign Sovereign Immunities Act (FSIA) “provides

the sole basis for obtaining subject matter jurisdiction over a

foreign state in the courts of this country.” Argentine Republic

v. Amerada Hess Shipping Corp.,

(1989). In

relevant part, the Act confers jurisdiction over actions based:

[1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside of 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.

(a)(2).

The plaintiffs rely explicitly and exclusively on the

third clause as the basis for jurisdiction. See Compl. ¶ 5. The

- 3 - defendants concede that their alleged breach of contract occurred

in Canada, and that it came in connection with commercial

activity in Canada, but they maintain that their alleged breach

did not cause a “direct effect” in the United States. The

defendants bear the burden of proving this claim by a

preponderance of the evidence. Agudas Chasidei Chabad of U.S. v.

Russian Federation,

(D.C. Cir. 2008).

Mere financial loss by an American individual or

company does not constitute a “direct effect” in the United

States. Zedan v. Kingdom of Saudi Arabia,

(D.C. Cir. 1988). But, as the Supreme Court established in

Republic of Argentina v. Weltover, Inc.,

(1992), a

foreign sovereign’s failure to deliver money that was supposed to

be delivered to an American bank account does meet the “direct

effect” requirement. In Weltover, the Argentine government

issued bonds denominated in U.S. dollars that permitted the

bondholder to specify one of four cities -- London, Frankfurt,

Zurich, or New York -- as the place where payment was to be made.

When the government realized that it did not have enough dollars

to retire the bonds, it unilaterally extended the time for

payment and offered the bondholders substitute instruments. The

plaintiffs, two Panamanian corporations and a Swiss bank, refused

to accept the substitute instruments and insisted on full

payment, specifying New York as the place where payment should be

- 4 - made. The government refused to pay. The Court concluded that

the government’s failure to retire the bonds had a “direct

effect” in the United States because “[m]oney that was supposed

to have been delivered to a New York bank for deposit was not

forthcoming.”

.

Weltover and its progeny in the Court of Appeals

establish four scenarios in which a foreign sovereign’s breach of

contract has a “direct effect” in the United States: (1) the

contract expressly designates an American location as the place

of payment; (2) the contract allows the payee to designate a

place of payment, and he designates an American location before

the breach occurs, see Weltover,

; (3) the

contract is silent on payment location, but the payee asks to be

paid at an American location, and the payer agrees to do so

before the breach occurs, see I.T. Consultants, Inc. v. The

Islamic Republic of Pakistan,

(D.C. Cir. 2003); and

(4) the contract is silent on payment location, and the parties

do not subsequently agree on a payment location, but there is a

“longstanding consistent customary practice” between the parties

of payment at an American location, see Goodman Holdings v.

Rafidain Bank,

(D.C. Cir. 1994) (Wald, J.,

concurring). In short, before the breach occurs, the parties

must have agreed -- either expressly or impliedly -- that payment

- 5 - would occur in the United States. See Peterson v. Royal Kingdom

of Saudi Arabia,

(D.C. Cir. 2005).

Turning to the contract in the present case, the first

page of the Articles of Agreement describes the “Payment Terms”:

As agreed and upon the satisfactory completion of Terms under Annex A, the following payments shall be made by Direct Payment on or before the dates indicated:

80% of the Contract value on or before 30 April, 2009 $43,332,537.00 plus GST

15% of Contract value on or before 31 October, 2009 $8,124,850.00 plus GST

5% of Contract value on or before 30 March 2010 $2,708,295.00 plus GST

Dkt. 1, Ex. 1, at 2 (emphasis added).2 On the same page, “1418-B

S. Stratford Road, Winston-Salem, NC USA 27103” is designated as

the “Contract Delivery Address.”

The plaintiffs argue that

these terms expressly obligated the defendants to provide “direct

payment” in the United States.

The situation is complicated by Cruise Connections’

decision to assign the RBC a portion of its first payment to

secure its letter of credit. Under the agreement, the RCMP would

send the first payment to the RBC, which would take the amount it

was owed and deposit the remainder in an RBC account in Cruise

Connections’ name. See Affidavit of Michael Sloane, ¶ 13.

2 The payment amounts were later amended when the RCMP requested additional berths, but the remaining terms were unchanged. See Dkt. 1, Ex. 3, at 2.

- 6 - Cruise Connections’ agreement with the RBC had no impact on the

second or third scheduled payments.

The initial question then is whether the RCMP’s

contractual obligation to provide “direct payment” of the second

and third payments to Cruise Connections meant that the RCMP was

supposed to send the payments to Cruise Connections’ listed

address in Winston-Salem, North Carolina. I do not believe it

did. I interpret “direct payment” to mean that the RCMP had to

make payments to an account of Cruise Connections’ choosing, not

that the RCMP had to send the money to Cruise Connections’

corporate office. That interpretation is confirmed, in some

part, by Cruise Connections’ decision to open an account at a

Winston-Salem bank on August 7, 2008 for the purpose of receiving

payments from the RCMP. As Cruise Connections explains, “[h]ad

the RCMP not breached the contract, Cruise Connections would have

invoiced the RCMP (as required by paragraph 7 of the Articles of

Agreement) for the second and third payments, and the invoices

would have directed the RCMP to make the second and third

payments by wire transfer to Tristone Community Bank in Winston-

Salem.” Dkt. 12, at 9 (citing Sloane Affidavit, ¶ 13). That

intention belies the claim that the contract itself required

payment at Cruise Connections’ office.

The next question is whether the facts match any of the

other scenarios hypothesized in the controlling Circuit cases.

- 7 - There is no longstanding practice between the parties. Nor is

there any subsequent agreement on a payment location -- while

Cruise Connections may have opened a bank account after the

contract was signed (and before the breach), they never

communicated that fact to the defendants, and the defendants

certainly never agreed to send money to that account. Cruise

Connections might argue that the contractual term “direct

payment” gave it the right to designate an account for payment,

but opening a bank account with the intention of demanding

payment there is not an exercise of that right. Put simply,

before the alleged breach occurred, there was no agreement

between the parties, either explicit or implicit, to send the

second and third payments to an American location.

Cruise Connections notes that it would have made an

additional $6 million from third parties if the RCMP had not

breached: approximately $5 million from the cruise lines in “on-

board revenue” generated during the Games, and approximately $1

million from a travel agency that agreed to charter one of the

cruise ships during its transit from San Diego to Vancouver.

These are not “direct” effects. “An effect is ‘direct’ if it

follows ‘as an immediate consequence of the defendant’s . . .

activity.’” Weltover,

(quoting Weltover, Inc. v.

Republic of Argentina,

(2d Cir. 1991)); see

also Princz v. Federal Republic of Germany,

, 1172

- 8 - (D.C. Cir. 1994) (“A direct effect . . . has no intervening

element, but, rather, flows in a straight line without deviation

or interruption.”). Cruise Connections’ agreements with the

cruise lines and with the travel agency were not part of its

contract with the defendants. Therefore, there was an

“intervening element” -- Cruise Connections’ inability to perform

its contractual obligations to the third parties -- between the

defendants’ actions and Cruise Connections’ financial loss.

At the hearing on this motion, Cruise Connections cited

two cases to support its contention that its lost third-party

payments were a direct effect of the RCMP’s alleged actions: Lyon

v. Agusta S.P.A.,

(9th Cir. 2001), and Harris Corp.

v. Nat’l Iranian Radio & Television,

(11th Cir.

1982). The plaintiffs seize on the court’s holding in Lyon that

a defendant’s actions can have a direct effect in the United

States without being foreseeable to the defendant. Lyon,

. If there can be unforeseen direct effects,

plaintiffs theorize, then the unforeseen loss of third party

payments here could constitute a direct effect. That argument

misses the point: Cruise Connections’ problem is that there was

an intervening element between the defendants’ actions and its

losses, not that those losses were unforeseeable to the

defendant. Harris too is of little help to the plaintiffs --

while the court found a direct effect there, it did so well

- 9 - before the Supreme Court refined the “direct effect” standard in

Weltover.

JAMES ROBERTSON United States District Judge

- 10 -