Gujarat Farmers Win The First Round Against World Bank

In an important victory for the fishing community and farmers of Mundra, Gujarat, the U.S. Supreme Court allowed them to sue World Bank's private lending arm—International Finance Corporation.

The IFC had loaned $450 million for the construction of Tata Power's Mundra power plant in 2008. The loan agreement gave IFC supervisory authority over the project which included implementation of an Environmental and Social Action plan. The fishing and farming community had sued IFC claiming that its failure to supervise this plan had caused environmental damage — pollution from the plant harmed the surrounding air, land, and water.

Also Read: Gujarat's Farmers Have Taken On World Bank's Lending Arm. Are They Likely To Succeed?

When the issue was first raised by the farming community of Mundra in 2015, IFC had argued in the District Court of Columbia that the International Organizations Immunities Act, 1945 grants it absolute immunity from being sued. The District Court had held this law gives international organisations the same immunity as is enjoyed by foreign governments. The D.C. Circuit also confirmed the decision.

IFC's Concerns ‘Inflated'

The U.S. Supreme Court disagreed with the views of lower courts in its order on Wednesday. It pointed out that until 1945, courts deferred to the views of the Department of State in deciding whether a given foreign government should be granted immunity from a particular suit. In making this decision, the court order explained, the State Department adhered to the classical theory of foreign sovereign immunity. According to that theory, foreign governments are entitled to “virtually absolute” immunity as a matter of international grace and comity.

But that changed in 1952, the U.S. Supreme Court noted, when the State Department decided that it would adopt the newer “restrictive” theory of foreign sovereign immunity. This was later codified in the Foreign Sovereign Immunities Act.

“Under that theory, foreign governments are entitled to immunity only with respect to their sovereign acts, not with respect to commercial acts. The State Department explained that it was adopting the restrictive theory because the widespread and increasing practice on the part of governments of engaging in commercial activities made it necessary to enable persons doing business with them to have their rights determined in the courts.”

IFC's own charter does not state that it is absolutely immune from suits, the court's order noted.

Having said that, the U.S. Supreme Court took note of IFC's internal audit which had stated that Coastal Gujarat Power—a wholly-owned subsidiary of Tata Power—did not comply with the environmental and social action plan in constructing and operating the plant. This was in violation of terms of the loan agreement laid down by IFC which allowed for revocation of financial support if there was a breach by Coastal Gujarat.

To IFC's argument that such suits would bring a flood of foreign-plaintiff litigation into U.S. courts, the Supreme Court said that such concerns were inflated.

Short-Lived Victory?

The U.S. Supreme Court has made way for IFC to be sued and the merits of this case will now be argued in the lower court. But certain observations by the Supreme Court may adversely impact the arguments of Mundra's farmers.

The court observed that under the Foreign Sovereign Immunities Act, international organisations like IFC can be sued for commercial activities that have a sufficient nexus to United States. It pointed to earlier judgments of the court to say:

A lawsuit must be based upon either the commercial activity itself or acts performed in connection with the commercial activity. Thus, if the gravamen of a lawsuit is tortious activity abroad, the suit is not based upon commercial activity within the meaning of the FSIA's commercial activity exception. 

The Supreme Court made these observations since the U.S. government had made an oral argument to say that it's doubtful if the Mundra farmer's case — which largely concerns allegedly tortious conduct in India — would satisfy the “based upon” requirement under Foreign Sovereign Immunities Act.