Introduction
In exporting defense articles and services abroad, the United States primarily relies on Direct Commercial Sales (DCS) and Foreign Military Sales (FMS). DCS refers to the type of arm s sale whereby a U.S. defense contractor directly deals with a foreign government or buying e ntity.1Derek Gilman et al., Foreign Military Sales & Direct Commercial Sales, DEF. SEC. COOPERATION AGENCY 1 , 19 (Sept. 30, 2014), https://www.dsca.mil/sites/default/files/final-fms-dcs_30_sep.pdf. FMS, on the other hand, involves an arms trade between the United States government (USG) and its foreign counterpart. 2Id. at 1. In an FMS program, which is governed by the Arms Expo rt Control Act (AECA),3See 22 U.S.C.S. § 2751 (LexisNexis through Pub. L. No. 116-158). a foreign government enters into an agreement with the USG to purc hase defense articles and services on a “‘no-profit’ and ‘no-loss’” basis.4Foreign Customer Guide, DEF. SEC. COOPERATION AGENCY 3 (July 15, 2018), https://www.dsca.mil/sites/default/files/2018_dsca_foreign_customer_guide.pdf [hereinafter FCG].
What is peculiar about FMS is that it is structured as, and strictly proceeds as, a governme nt-to-government transaction.5Security Assistance Management Manual, DEF. SEC. COOPERATION AGENCY C5.4.16., https://samm.dsca.mil/ chapter/chapter-5 (last visited June 24, 2021). As such, in the FMS context, the USG commits itself to provid ing certain defense items or services and the purchasing foreign state commits itself to abide b y specific terms and conditions associated with the sale including payment obligations.6See id. at C8.1.1., C8.2.3. To th is end, the USG and the foreign sovereign enter into the underlying transaction following mul tiple rounds of negotiations on contractual terms including the specifications of the defense article(s) being acquired, the contract price of such acquisition, and delivery milestones. In this contractual scheme, “the United States procures defense articles and services directly from a d efense contractor. The U.S. Government then sells these articles and services to the foreign go vernment.”7Heroth v. Kingdom of Saudi Arabia, 565 F. Supp. 2d 59, 62 (D.D.C. 2008). Accordingly, there is no direct privity of contract between the U.S. manufacturer of the defense article being procured and the foreign government.8See id.
A. FMS and South Korea
The United States and the Republic of Korea (ROK) share a long history of military partnership.9U.S. Relations with the Republic of Korea, U.S. DEP’T OF STATE, (Sept. 22, 2020), https://www.state.gov/u-s-r elations-with-the-republic-of-korea. In this overarching framework of tactical cooperation, the USG implemented more th an USD thirty billion in FMS to the ROK.10U.S. Security Cooperation with Korea, U.S. DEP’T OF STATE,(Jan. 20, 2021), https://www.state.gov/u-s-securi ty-cooperation-with-korea/. The USG has implemented recent and significant FMS exports11Id. at 12. including the “F-35 Joint Strike Fighter, P-8A Patrol Aircraft, Patriot Advanc ed Capability-3 missile systems, Global Hawk Unmanned Aerial Vehicle, KF-16 aircraft Upgrades, Aegis Combat Systems, Harpoon Missiles, and AH-64E Attack Helicopters.”12Id. In fact, the ROK is an all-time top purchaser of U.S. weapons and related services.13Curtis Brown, Ryan Browne & Zachary Cohen, Here’s Who Buys the Most Weapons from the U.S., CNN, htt ps://edition.cnn.com/2016/05/24/politics/us-arms-sales-worldwide/index.html (last updated May 25, 2016). Under § 3 of the AECA, the U.S. may sell certain “defense articles and services to foreign countries and international organizations when the President formally finds that to do so will strengthen the security of the U.S. and promote world peace.”14Foreign Military Sales (FMS), DEF. SEC. COOPERATION AGENCY 3, https://www.dsca.mil/programs/ foreign-military-sales-fms (last visited June. 22, 2021). It thus appears that the ROK has relied on FMS in importing certain defense articles from the U.S. because they may onlybe purchased through the FMS program. Also, the FMS program offers advantages to the buyer in terms of product warranty and security, as well as Post Logistics Support. 15See Defense Audit Division, KF-16 Fighter Aircraft Performance Improvement Project Implementation Statu s, KOREAN BOARD OF AUDIT AND INSPECTION 5 (June 2016), https://www.bai.go.kr/bai/cop/bbs/detailBoardArticle.do?bbsId=BBSMSTR_100000000009&nttId=115989&mdex=bai20&searchWrd=&searchBgnDe=&searchEndDe=&searchYear=2016&pageIndex=1&recordCountPerPage=10&buseo=&searchCate=9080&searchCateSub= (For a ROK perspective on this subject).
B. Letter of Acceptance
In terms of the contracting process, an FMS transaction usually proceeds in the order of: a ) a foreign government issuing a Letter of Request (LOR); b) the USG issuing, in turn, a Lette r of Offer and Acceptance (LOA); and c) the foreign government’s signing off on the LOA.16See Security Assistance Management Manual, supra note 5, at C5.1.1, C5.4.2, C8.1. The LOA contains a variety of contractual clauses. At the end of the day, what governs FMS f rom a contractual standpoint is the terms of the executed LOA.17FCG, supra note 4, at 3.
On the subject of dispute resolution, § 7.2 of the standard LOA provides: “(t)he USG and the Purchaser agree to resolve any disagreement regarding this LOA by consultations between the USG and the Purchaser and not to refer any such disagreement to any international tribun al or third party for settlement.”18Don McCormick et al., FMS Customer Financial Management Handbook (Billing), LIBR. OF CONGRESS 3–8 (Aug. 2007), https://www.yumpu.com/en/document/read/12249881/fms-customer-financial-management-handbook-billing-tenth-. On a casual reading of this LOA language, it may appear th at litigation is not envisaged as a viable mechanism of dispute resolution. The issue then beco mes if court litigation between the USG and the purchasing foreign state is in effect barred by virtue of this LOA provision and also by the doctrine of foreign sovereign immunity (FSI).
Assuming commencing a legal action is not otherwise prohibited in relation to an FMS di spute, a participating party to an FMS transaction may choose to sue the other party in a dome stic court of that state or in a U.S. court. In what follows, an analysis will be attempted on the subject of FSI, LOA language, and the related issues of FSI waiver as well as choice of law cl ause, in a comparative way. The focus of this comparative analysis will be on the ROK, where such analysis is appropriate and feasible. The result of this probe will reveal that litigation i n the FMS context is not entirely precluded.
2. Foreign Sovereign Immunity: A Comparison between the U.S. and ROK
Whether one state can be sued in a court of another state involves the question of foreign sovereign immunity.19See generally MALCOLM N. SHAW, INTERNATIONAL LAW (6th ed. 2008); ANTONIO CASSESE, INTERNATIO NAL LAW (2nd ed. 2005). In the realm of public international law, how states recognize and enforce the domestic effects of foreign sovereign immunity is a matter of policy-driven discretion for each state.20See David Gaukrodger, Foreign State Immunity and Foreign Government Controlled Investors, OECD PUBLISHING 14 (Feb. 2010), https://www.oecd.org/corporate/mne/WP-2010_2.pdf. For instance, certain states may opt to enact a domestic statute to, where warra nted, apply sovereign immunity in the context of domestic legal proceedings, while others ma y directly recognize sovereign immunity in a similar setting without an overt instrument of le gislation.21For instance, in the U.S., the doctrine of FSI is codified in and regulated through the Foreign Sovereign Immu nities Act. By contrast, in the ROK, the same doctrine has been developed and refined through jurisprudence.
The U.S. has approached the subject of foreign sovereign immunity by enacting a statute named the Foreign Sovereign Immunities Act (FSIA).2228 U.S.C. §§ 1602–1611 (2020). Section 1604 of the FSIA codifies the basic principle of sovereign immunity that a foreign state is, in principle, immune from the ju risdiction of U.S. federal and state courts.23David F. Klein, A Theory for the Application of the Customary International Law of Human Rights by Domest ic Courts, 13 YALE J. INT’L L. 332, 358 (1988). One notable, enumerated exception to this doctrin e is a “commercial activity carried on . . . by the foreign state” under FSIA § 1605(a)(2). Such activity includes a foreign state’s commercial activity on U.S. soil, the foreign sovereign’s activity performed in the U.S. in connection with the same state’s commercial activity outside the U.S., and the foreign state’s act outside the territory of the United States in connection with that state’s commercial activity elsewhere, which then has a direct effect in the United States.2428 U.S.C. § 1605(a)(2) (2020).
In contrast to the United States, the ROK has refined the doctrines of foreign sovereign im munity primarily through precedent. This approach is attributable to Article 6.1 of the country ’s Constitution, which states: “Treaties duly concluded and promulgated under the Constitutio n and the generally recognized rules of international law shall have the same effect as the dom estic laws of the Republic of Korea.”25S. KOR. CONST. art. VI, § 1. Accordingly, there is no need for any enforcement legislation to be in place for sovereign immunity to be applied. In the ROK, therefore, whether to recognize foreign sovereign immunity in a given case has largely been for the judiciary to decide. In terms of precedent in this context, the Korean Supreme Court held that under customar y international law and practice, no state is obligated to submit to the jurisdiction of another st ate’s courts in the absence of a treaty requiring otherwise or unless the foreign state has validly waived its sovereign immunity.26Supreme Court, Judgment of May 23, 1975, 74Ma281 (R.O.Korea).
In 1998, however, the highest court overturned 74Ma281 by holding en banc that under cu rrent customary international law and practice, while a sovereign or public act of a state (Jure Imperii) is generally immune from the jurisdiction of another state, a state’s private or comm ercial act (Jure Gestionis) is not likewise immune from the jurisdiction of adjudicating Korea n courts.27See Supreme Court, Judgment of Dec. 17, 1998, 97Da39216 (R.O.Korea); see also Supreme Court, Judgment of Dec. 13, 2011, 2009Da16766 (R.O.Korea). In other words, Korean courts may exercise jurisdiction over the private act of a foreign state, which has transpired in the territory of Korea, provided that such act is not otherw ise sovereign in nature and the Korean court’s assumption of jurisdiction does not interfere with sovereign activities of the foreign state.28BAE, KIM & LEE, LLC, ARBITRATION LAW OF KOREA: PRACTICE AND PROCEDURE 77 (1st ed. 2012).
A. Commercial Activity Exception
Both in the United States and ROK, then, a foreign state is immune from the jurisdiction of American or Korean courts. Such immunity stands, unless, for instance, the foreign state has engaged in commercial activity in the territory of the other state. On the concept of commercial activity under the FSIA, the U.S. Supreme Court ruled that:
…the question is not whether the foreign government is acting with a profit motive or instead with the aim of fulfilling uniquely sovereign objectives. R ather, the issue is whether the particular actions that the foreign state perform s (whatever the motive behind them) are the type of actions by which a priva te party engages in “trade and traffic or commerce,”…Thus, a foreign gover nment’s issuance of regulations limiting foreign currency exchange is a sove reign activity, because such authoritative control of commerce cannot be exe rcised by a private party; whereas a contract to buy army boots or even bulle ts is a “commercial” activity, because private companies can similarly use sales contracts…29Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614 (1992).
According to Weltover, what is seminal in determining if a foreign state’s act falls under t he commercial activity exception is whether such act is that which only a sovereign state can perform. As such, when “two governments deal directly with each other as governments,” such dealings are distinguishable from commercial activity.30Cicippio v. Islamic Republic of Iran, 30 F.3d 164, 168 (D.C. Cir. 1994). In the ROK, as noted above, a forei gn state is immune from the jurisdiction of Korean courts unless the state has engaged in a private or commercial act. According to the Korean Supreme Court, such act refers to a juristic act by a state as a commercial actor on an arm’s length basis under the rubric of private law.31Supreme Court, Judgment of Dec. 21, 1993, 93Nu13735 (R.O.Korea). This definition is comparably similar to the concept of commercial activity under the FSIA.
Against the statutory framework of FSIA and related precedent, the question then become s if an FMS transaction qualifies as “commercial activity” carried on by a foreign state to war rant state immunity under the FSIA. In a controversy involving FMS, if the subject matter of t he underlying transaction is seen as the sale and purchase of a commercial item, then U.S. cou rts may assume jurisdiction over the parties to such transaction under FSIA § 1605 a.2. On the other hand, if the essence of FMS is seen as involving sovereign-to-sovereign relations to the exclusion of any individual or corporate entity, then it will not trigger the commercial activit y exception under the FSIA.
In this regard, in a case involving a dispute between the Saudi Government and the employe es of a U.S. defense contractor hired to provide military base security for the Saudi military, t he D.C. District Court made the following obiter dicta observation regarding the nature of FM S:
Plaintiffs are precluded from proceeding under the commercial activity exc eption for the additional reason that Defendants’ actions do not constitute c ommercial activity under the FSIA. Only when “a foreign government acts , not as regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are `commercial.’” The Defendants’ participation in the FMS program, which is limited to foreign governments and in ternational organizations, is the type of activity in which a private player cannot participate.32Heroth v. Kingdom of Saudi Arabia, 565 F. Supp. 2d 59, 68 n.9 (D.C. Cir. 2008) (internal citations omitted).
According to Heroth, therefore, participation in an FMS program is limited to foreign sov ereigns to the exclusion of any private actor. Therefore, it would be difficult to characterize a n FMS transaction as a commercial activity under FSIA, which arguably precludes the assum ption by U.S. courts of subject matter jurisdiction over a foreign government participating in a n FMS program.33By contrast, in a dispute between BAE Systems Technology Solution & Services Inc. and the ROK’s Defense Acquisition Program Administration (DAPA) over a Memorandum of Agreement that “obligated BAE to use it s best efforts to reach agreement with the [U.S. Government] to include certain contract terms and scope of wor k” in the FMS contract between the USG and DAPA, the trial court noted “the fundamentally commercial natur e” of the MOA. BAE Sys. Tech. Sol. & Serv., Inc. v. Republic of Korea’s Def. Acquisition Program Admin., P WG-14-3551, 2016 U.S. Dist. LEXIS 146593, 13–14 (D. Md. Oct. 24, 2016) (citation omitted). Arguably, there fore, this type of private contract relating to the underlying FMS transaction is commercial in nature and, hence, eligible for the commercial activity exception under the FSIA. The foregoing holding is arguably at odds with th e Fourth Circuit’s appellate ruling that a foreign state is barred from suing a US defense contractor partaking in an FMS program. See infra note 44. It is noted that the BAE appellate court did not consider the commercial acti vity exception at all. Of course, this prognosis is subject to the caveat that the U.S. Supreme Co urt may rule otherwise on the nature of FMS at an opportune time in the foreseeable future.
3. LOA Text
Aside from the doctrine of foreign sovereign immunity, the wording of the LOA itself ma y be construed as restricting litigation. On this issue, there may be a theory that since the text of § 7.2 alludes to bilateral “consultation” as the only means of redressing “any disagreement ” under the LOA, any referral of an open dispute to a third party including domestic courts, be they American or foreign, for the purpose of dispute resolution is categorically prohibited in respect to an FMS transaction. This theory is backed by the Trimble case.34 Sec’y of State for Def. v. Trimble Navigation Ltd., 484 F.3d 700 (4th Cir. 2007).In Trimble, the U nited States Court of Appeals for the Fourth Circuit observed that § 7 of the LOA explicitly st ates “that any disagreement regarding the LOA between UK MOD and the United States mus t be resolved through bilateral consultations and not through referral ‘to any international trib unal or third party for settlement.’”35Id. at 705.
Likewise, the same appellate court has recently noted:
Nor can the two sovereigns sue each other for failure to perform on the gov ernment-to-government contract: their only recourse is to hold bilateral con sultations…
The FMS structure strictly circumscribes the availability of litigation. A for eign state cannot sue the United States for failure to perform pursuant to th e sovereign-to-sovereign agreement, including with respect to price. The fo reign state’s only recourse is to consult with the U.S. government.36BAE Sys. Tech. v. Republic of Korea’s Def. Acquisition Program Admin., 884 F.3d 463, 468, 476 (4th Cir. 2 018).
Trimble and BAE, therefore, assume that the term “third party,” as used in § 7 of the LOA , includes American and foreign courts. In the meanwhile, no foreign sovereign has yet to sue the U.S. government in any U.S. state or federal court for a cause of action related to an FMS transaction. Accordingly, there is yet to exist a definitive Court enunciation on the exact meaning and scope of § 7 of the LOA.
4. Waiver and Choice of Law
Despite the doctrine of sovereign immunity and the language of the LOA, FMS may be the subject of litigation if the foreign state should choose to waive its immunity. In this respect, FSIA § 1605(a)(1) provides that a foreign state shall be subject to the jurisdiction of U.S. cour ts if the foreign state has waived its immunity either explicitly or by implication. The foreign state’s commencement of a suit in the U.S. may well qualify as a waiver of that country’s sovereign immunity. In addition, § 7.1 of the LOA contains a choice of law clause to the effect th at “[t]his LOA is subject to U.S. law and regulation, including U.S. procurement law.”37Letter of Offer and Acceptance (LOA) Standard Terms and Conditions, DEF. SEC. COOPERATION AGENCY, https://samm.dsca.mil/figure/figure-c5f4 (last visited Apr. 12, 2021). It is not clear if this LOA provision grants ex clusive jurisdiction to U.S. courts. In the Korean context, the parties to an international transaction are free to cr aft a choice-of-law clause designating a competent court of first instance. Minsasosongbeob [Code of Civil Proc edure], Act No. 547, Apr. 4, 1960, amended by Act No. 13952, Feb. 3, 2016, art. 29 (S. Kor.); see also Gugjesa beob [Conflict of Laws Act], Act No. 547, Jan. 15, 1962, amended by Act No. 13759, Jan. 19, 2016, art. 25 (S. Kor.). In this regard, in order for a choice-of-law clause granting exclusive jurisdiction to a foreign court to the e xclusion of Korean trial courts, to be valid: a) the case in question must not belong to the exclusive jurisdiction o f Korean courts; b) the foreign court is authorized to assume jurisdiction over the case under its own laws; c) the case at hand is to bear reasonable relevance and nexus to the foreign court; and d) the parties’ underlying agree ment on exclusive jurisdiction is not deemed patently unreasonable or otherwise unfair. See Supreme Court [S. Ct.], Aug. 26, 2010, 2010Da28185, (S. Kor.). Unde r this type of clause, therefore, in the event of a dispute relating to an FMS transaction, U.S. la w and regulation will be resorted to and applied in resolving the dispute, to the exclusion of a ny non-U.S. law. The United States Court of Appeals for the Fourth Circuit observed that in “ a number of cases” it was held that “various choice of law provisions in contracts constitute i mplied waivers of sovereign immunity.”38Eckert Int’l, Inc. v. Gov’t of the Sovereign Democratic Republic of Fiji, 32 F.3d 77, 79 (4th Cir. 1994). Whether this holding is equally applicable to an F MS program and any controversy arising out of or relating thereto, remains to be seen.
A. Choice of Law in ROK
Where an FMS-related suit is instituted in Korea, the adjudicating Korean court will need to determine the governing law of the dispute at hand. As has been noted, under § 7.1 of the LO A, the LOA will be interpreted in accordance with U.S. law and regulations including the FSI A. In light of such a jurisdictional provision, the Korean court may thus be barred from lookin g to Korean law and regulation for guidance. On the subject of governing law, the Korean Su preme Court held that in a commercial contract involving foreign law as its governing law, th e Korean court will respect and apply the parties’ mutually chosen law, unless such choice of law is contrary to the public interest or good morals of the ROK or otherwise unjustly underm ines the legal interests of the contracting parties.39Supreme Court [S. Ct.], Mar. 20, 2015, 2012Da118846 & 2012Da118853 (consolidated) (S. Kor.). In light of 2012Da118846, in litigation inv olving the FMS, as long as the FSIA is found substantially consistent with the Korean jurispru dence on foreign sovereign immunity, there may be no ground to treat that statute as contrary to the public interest and societal morals of ROK or as otherwise undermining the legitimate i nterests of the Korean government that is party to an FMS deal.
In construing and applying the FSIA, the relevant legal standard is such that the Korean c ourt is expected to apply the statute as it has been understood and interpreted by U.S. courts, i ncluding the Supreme Court.40Id. It will thus become necessary for the adjudicating court to put itself in the shoes of a U.S. court in interpreting and applying the FSIA by taking into account Heroth and other pertinent lines of cases.41Suk Kwang Hyun, Hangugbeob-won-eseo jegidoen jung-gugbeob-ui jaengjeom – gyeyagbeob, bulbeobhaeng-wibeob, hon-inbeobgwa oegugpangyeol-ui seung-in⋅jibhaeng-eul jungsim-eulo [Several Chinese Law Issues rais ed before Korean Courts: With Emphasis on Laws on Contract, Tort, Marriage and Recognition and Enforceme nt of Foreign Judgments], 51 Seoul Daehakgyo Beobhak (서울대학교 法學) [SEOUL L.J.] 3, 2006 at 187–88. An existing ruling of the Court, if any, would be a highly influential point of reference as part of this judicial scrutiny.42See, e.g., BAE Sys. Tech. v. Republic of Korea’s Def. Acquisition Program Admin., 884 F.3d 463, 468, 476 ( 4th Cir. 2018).
In the process of assessing a case before it, it is not clear if the Korean court would deny t he commercial nature of the FMS as there is yet no authoritative Court holding on the subject. In addition, whether the choice of law as encapsulated in § 7.2 of the LOA denotes both gove rnments have thereby implicitly waived sovereign immunity, remains to be ascertained. In lig ht of these possible points of contention, where the ROK government should choose to sue the USG in ROK in relation to an FMS transaction, the Korean court may attempt to get to the merits of the case, rather than dismiss it summarily.43For instance, in a civil litigation between Raytheon Company (RTN) and the Korean government stemming from an FMS transaction, both the trial court and the appellate court in the ROK decided on the merits of the case. See Seoul Central District Court [Seoul Cent. Dist. Ct.], Nov. 10, 2017, 2015Gahab542001 (S. Kor.); see also S eoul High Ct., 2017Na2669824 Aug. 31, 2018 (S. Kor.). In this case, the Korean government sued RTN for the l atter’s alleged breach of a written agreement with the Korean government in the context of an FMS program. RTN participated in the program as a subcontractor to BAE Systems Technology Solutions & Services Inc., a U.S. defense contractor. BAE was the prime contractor to the U.S. government. After assessing all relevant pleadings and evidence, both Korean courts ruled in favor of RTN holding that RTN is not liable to compensate the Korea n government for any breach of the underlying agreement. This outcome is considered contrary to the BAE court ’s holding that a foreign state is barred from suing “the U.S. contractor retained by the U.S. government to fulfill an FMS contract, because the foreign state does not contract directly with that contractor for the goods and servi ces the contractor ultimately supplies (via the U.S. government) to the foreign state.” BAE Sys. Tech., 884 F.3d at 476. This is predictably so even in the presen ce of a possible USG claim that they are immune from the jurisdiction of Korean courts under the FSIA and established Korean precedent.
5. Conclusion
In conclusion, according to the existing precedent, it is likely that a foreign state is precluded from suing the USG in U.S. courts over a controversy relating to an FMS transaction. Ins ofar as the subject matter of an FMS transaction involves the sale and purchase of weapons, a rguably a commercial item,44See Sec’y of State for Def. v. Trimble Navigation Ltd., 484 F.3d 700, 703 (4th Cir. 2007). FMS is not open to the participation of natural or legal persons. It is, accordingly, distinguishable from a commercial activity undertaken by a government ent ity. However, in the absence of an explicit Court ruling on the subject, whether litigation is en visaged or permitted in the context of FMS remains in a state of flux and hence an open issue.
It appears that while § 7.2 of the LOA prohibits a referral of a disagreement under the LOA t o a third party, it is not clear if the term “third party” here is necessarily inclusive of domestic courts, the judicial branch of government. In fact, the term may well denote a third country, rather than U.S. or foreign courts, which may be empowered to undertake judicial review of a dispute under the LOA, an agreement between two sovereigns. In other words, even though § 7.1 of the LOA contemplates a bilateral consultative process in the event of dispute, it is silen t on what happens when such a process fails. In the face of such a textual lacuna, while the pa rties to the LOA may not seek redress from any international tribunal or court, they may still resort to litigation in a proper forum including the ROK to iron out their differences.
