Lifting the veil on legal immunity to multilateral institutions

Multilateral institutions working across various geographies could now be open to scrutiny because of a protest group that challenged the legal immunity enjoyed by the World Bank arm, International Finance Corporation (IFC), right up to the US Supreme Court. 

In a February order, the apex US federal court ruled that the International Organizations Immu­nities Act (IOIA) of 1945 grants international organisations the “same immunity” from suits “as is enjoyed by foreign governments” at any given time. However, the Foreign Sovereign Immunities Act of 1976 governs the immunity of international organisations. “IFC is, therefore, not absolutely immune from suits,” the court said. Consequently, the Supreme Court reversed a judgment of the United States Court of Appeals for the DC Circuit and remanded the case for further proceedings.

The judgement came in a case filed by one Budha Jam, representing fishermen and farmers of Mundra in Gujarat. IFC has part-funded Tata’s Mundra Ultra Mega Power Project. 

IFC argued before the court that the need for immunity from suits was “particularly important” with respect to the country in which an organisation was headquartered. In the absence of a guarantee of immunity, the host country’s courts could exercise considerable control over the organisation’s functions. The underlying reason was such international organisations are governed by, and receive contributions from, all of the member states and so should not be subject to the jurisdiction or control of any one of them.

IFC said the IOIA mandates that international organisations continue to receive the same virtually absolute immunity that the Congress prescribed when it enacted the statute in 1945. “Abandoning that long-standing interpretation in favour of the restrictive immunity petitioners seek would defeat the fundamental purpose of organizational immunity by impeding international organizations’ ability to pursue their development objectives. It would also open US courts to a flood of foreign-focused lawsuits that would require US courts to second-guess international organizations’ core policy judgments,” IFC said in its representation.

But, Bharat Patel, general secretary, Machimar Adhikar Sangharsh Sangathan, a petitioner in the case, noted: “International finance institutions have to be mindful of the fact that development, which is being promoted, need to take into account the traditional rights and livelihood of the people who get affected by the project.”  

Post the order which upheld restrictive immunity, IFC said it is going to work to ensure that this ruling did not affect its ability to deliver “for our partner countries and does not hinder our mission”.

Under international law, one foreign state is immune from the jurisdiction of the courts of another state. In the case of the US, it is the IOIA that gives the legal shield. But as governments started funding commercial activities, exceptions were created through the Foreign Sovereign Immunities Act to provide legal remedies to private citizens, organisations and companies against government entities. “Certain international institutions that carry out quasi-sovereign functions are granted immunity for certain acts. This immunity, however, does not apply in the context of actions which essentially are of a commercial nature,” explained Ran Chakrabarti, partner, IndusLaw.

Generally, when contracting with states or international institutions for goods and services, it is quite common for the counterparty to require an express waiver of sovereign immunity in any related contractual documentation. “Whether or not IFC has state immunity, to a certain extent, is a red herring and relates only to the question whether a court has jurisdiction over an alleged dispute and whether it is admissible before a court,” said Chakrabarti. The crux of the question, or the merits of the case, would depend on whether IFC breached its obligations under the contractual documentation, causing damage to third parties affected by the consequences. 

Underlining the impact of the case and the ruling, Brian L Whisler, principal, compliance & investigations, Baker & McKenzie, said: “We believe this case may have precedential value in the event that a challenge is brought against other multilateral development banks involved in commercial lending activity with a nexus to the US, as most of these development banks are designated as organisations covered by the IOIA, including the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank.”

India has its own law to govern immunities granted to international organisations, titled the United Nations (Privileges and Immunities) Act, 1947.  Section 3 enables the government to extend certain provisions of the Act to different international organisations from time to time.

 “Exercising the power under Section 3, the provisions of the said Act were extended to IFC in 2016, upon notification by the Ministry of External Affairs,” noted Anand Verma, managing partner, APT Legal. “Any exception to the immunity, such as the one interpreted by the US Supreme Court, would involve a challenge or an interpretation to the provisions of the 1947 Indian Act, and cannot be assumed as a matter of course,” he added.

Even if the immunity remains unchallenged in India, the accountability pressure on multilateral institutions will increase, said experts. According to Chakrabarti, the US ruling essentially requires international lenders to ensure that monitoring processes in relation to environmental impacts and mechanisms to address those impacts are strictly adhered to.