Decision Implies all Multilateral Development Banks Accountable As Well

(Washington, D.C.) – The Government Accountability Project (GAP) is applauding a recent decision by the U.S. Court for the District of Columbia holding that a consultant for the Inter-American Investment Corporation (IIC), the private investment arm of the Inter-American Development Bank (IDB), has the right to sue the IIC for breach of implied contract and unjust enrichment. The decision establishes that the IIC, and by implication, international organizations operating under similar charters in the Unites States, have waived immunity from lawsuits brought against them by external commercial contractors and consultants.

“This ruling sets an important precedent,” said Bea Edwards, GAP International Program Director. “The decision means that the multilateral development banks can be sued by contractors and consultants for breaking an agreement. This happens and is threatened far too frequently – especially when the consultant raises issues of corruption.”

Since multilateral development banks lack effective whistleblower protections, simply refusing to pay for services can be used against potential whistleblowers who discover and disclose fraud.

In an effort to have the suit dismissed, the IIC claimed statutory immunity, as extended to it under the IIC Charter, as well as the International Organizations Immunities Act, which grants “immunity from suit and every form of judicial process.” The plaintiff’s attorney, Doug Hartnett, however, argued that a lawsuit may be brought, assuming that the international organization has waived its immunity.

Hartnett, of Elitok and Hartnett, based his arguments on Article VII of the IIC Charter, which states:

Actions may be brought against the Corporation only in a court of a competent jurisdiction in the territories of a member country in which the Corporation has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities (IIC Charter Art. VII, § 3(a).

Courts have interpreted this language, which appears in the charters of numerous international organizations, including the World Bank and the IDB, as a waiver of immunity in certain kinds of cases. In Mendaro v. World Bank (D.C. Cir. 1983), however, the Court reasoned that the World Bank enjoys immunities “since the purpose of the immunities accorded international organizations is to enable the organizations to fulfill their functions…” The Court further reasoned that “…it is likely that most organizations would be unwilling to relinquish their immunity without receiving corresponding benefit which would further the organization’s goals.”

However, the reasoning allowed that if, in commercial transactions, immunity were not waived, the Organization would be unable to do business except on a cash basis, since no reasonable individual would extend credit to an Organization with whom a contract could not be enforced. The Organization would then be unable to operate because of its immunities.

In the current lawsuit (Vila v. the Inter-American Investment Corporation), the U.S. District Court reasoned that the consultant’s status as an independent contractor enabled him to “resort to judicial process,” and wrote, “Accordingly, the defendant (IIC) is not immune from the plaintiff’s claims for breach of implied contract or unjust enrichment.” While the Court also ruled that the plaintiff could not fully substantiate his claim for breach of implied contract, it did decide that the claim of unjust enrichment should proceed.

Essentially, the plaintiff has claimed that IIC senior management requested him in writing to perform loan syndication and other services, offered a success fee in compensation, accepted the services and then refused to pay for them. The services were valuable and extended over a period of six months. The plaintiff worked without a written contract in an effort to assist the IIC as it sought to meet deadlines, but was then rebuffed by the Organization, which told him he could not be paid because their internal audit controls and regulations prevented payment. The plaintiff in the case pointed out that the IIC senior management freely violated their own internal audit controls and regulations by requesting and accepting services without a contract, but only invoked their internal audit controls and regulations when payment was requested.

Hartnett said the ruling may have broad implications as the international organizations reduce their career staff in favor of outsourcing: “In recent years, organizations enjoying sovereign immunities are turning from an employee-based workforce to contractors for mission-critical work. With this ruling in place, consultants and contractors who previously found themselves victimized by unenforceable contracts will have real recourse through the courts.” The implications of this ruling may extend to asset management firms, which international Organizations, including the IDB, generally appoint to manage their employees pension contributions, and perhaps even their ratings.

The IIC is currently appealing the Court’s decision.