Matei Alexianu*

In September 2023, a U.S. district court issued its judgment in Petersen v. Argentina. The court ordered Argentina to pay $16 billion—the largest ever judgment against a country in U.S. court—to two former private investors in YPF, a state-controlled oil company. The award was the result of a breach of contract related to Argentina’s 2012 nationalization of a controlling stake in the firm. The case has already drawn comparisons with investment-treaty arbitration and calls for investors to consider bringing suits against foreign states in U.S. courts.

The YPF judgment is not the first large contract-based lawsuit against a foreign state, of course. Argentina itself has faced many such cases, such as the seminal Weltover v. Republic of Argentina case decided by the U.S. Supreme Court. But this case, decided three decades after Weltover, illustrates how sovereign protections in U.S. courts have eroded over time, leaving states exposed to more U.S. civil litigation in commercial disputes. And while the main alternative, investor-state dispute settlement (ISDS), has been heavily criticized along multiple dimensions in recent years (see, e.g., Behn, Fauchald, & Langford, eds.; UNCTAD), litigation is likely to perform as badly or worse along many of those dimensions. In particular, U.S. federal court litigation is arguably less competent, legitimate, and adaptable to the evolving needs of states and investors—thus threatening the principles of international comity and sovereign equality that motivate immunities.

Sovereign immunity and the commercial exception

When a government breaches its contractual obligations, an affected investor may, depending on the contract, seek recovery in two ways. First, the investor might sue the sovereign for breach of contract, either in a local court or another jurisdiction. This, of course, is what happened in the YPF case. Second, the investor might initiate an ISDS proceeding under a bilateral or multilateral investment treaty. (Although not all contract violations by a sovereign state amount to treaty breaches, many will give rise to plausible treaty claims, especially under the fair and equitable treatment standard.) Indeed, following the YPF nationalization, the company’s majority shareholder Repsol launched an ISDS proceeding against Argentina, which settled for $5 billion in 2014.

Historically, one of the main barriers to bringing contract-based suits in national courts has been sovereign immunity. Under customary international law, sovereign states are entitled to immunity from jurisdiction and enforcement in other countries’ courts. The United Nations Convention on Jurisdictional Immunities of States and Their Property—which is not in force but which observers consider to codify customary law in this area (see, e.g., Jones v. Saudi Arabia ¶ 47)—describes the exceptions, including waiver, commercial activity claims, tort claims, and arbitral agreements. In the United States, these sovereign protections have been codified in the Foreign Sovereign Immunities Act (FSIA). As a result, the success of investor claims in U.S. courts often hinges on whether the investor can prove that one of the exceptions to sovereign immunity, usually either the commercial activity or waiver exception, applies to the government defendant.

Given the broad protections that sovereign immunity provides, investors have often opted for ISDS instead. States do not have immunity—from jurisdiction, at least—in ISDS because they waive those protections when they sign an investment agreement. (An alternative view is that sovereign immunity does not apply to international arbitration to begin with since the process is not a public court proceeding.) The idea that an investment treaty waives immunity makes sense not only as a matter of treaty interpretation, but also when considering the function of the treaty. At its core, an investment treaty is an agreement between two or more states exercising their sovereign treaty-making powers to grant rights to each other and commit to a certain method of dispute resolution. This stands in contrast to investment contracts, which involve one state acting on the domestic plane to create certain rights, and which typically do not address the state’s international rights and obligations. Some contracts waive sovereign immunity, explicitly or implicitly, but many do not. Notably, the YPF by-laws were silent as to immunity.

The eroding protections of the Foreign Sovereign Immunities Act

However, the immunity-based distinction between litigation and ISDS is eroding as U.S. courts expand the scope of the FSIA commercial exception over time. This narrowing of sovereign immunity is not new: it dates back at least to the U.S. State Department’s 1952 Tate Letter, which adopted a restrictive view of immunity recognizing key exceptions to sovereign protections. In terms of the FSIA’s commercial exception, the most important development came in the U.S. Supreme Court’s 1992 Weltover decision. In that case (p. 614), the Court held that only the nature, not the purpose, of state activities determines whether they are commercial. And, according to the Court, commercial activities are those that a private party could perform. As one scholar recently put it, this definition was “as expansive as the statute would allow.” Weltover paved the way for the lower courts: since the decision, U.S. courts have applied its test to find commercial activities in conduct ranging from the Vatican’s religious and pastoral services to Taiwan’s not-for-profit cultural tours. But Weltover did not address how to classify otherwise commercial conduct that is shaped by, and that flows directly from, a sovereign act, such as expropriation. The case focused on whether the sovereign acted in the “manner of a private player” but left open the status of an act that a private player could perform but that was nevertheless accomplished in a manner exclusive to the sovereign. Confronted with this issue, the district and appellate court opinions in the YPF case illustrate how U.S. courts continue to expand the scope of the commercial exception.

Much of the YPF litigation, in both the district court and the court of appeals, focused on the applicability of the commercial exception. The key question was whether the case was based on (a) the sovereign act of expropriation of YPF’s shareholders (as Argentina argued), or (b) the commercial act of a breach of the YPF by-laws (as Petersen claimed). Argentina and YPF argued that any contractual breach was “inextricably intertwined” with the Expropriation Law and Argentina’s sovereign decision to expropriate 51% of YPF’s shares (i.e., those of Repsol). But both the district court and the Second Circuit held that the crux of the suit was Argentina’s failure to issue a tender offer to the minority shareholders—not the earlier expropriation, which was probably a sovereign act. Even if Argentina’s claimed purpose for reneging on its contractual duties was to facilitate a sovereign act of expropriation, the “nature” of a breach of contract as a commercial activity was determinative. The Second Circuit noted that nothing in the Expropriation Law prohibited Argentina from complying with its contractual obligations.

This conclusion appears to further expand the scope of the commercial exception to cover commercial conduct that is closely related to a sovereign act. The Second Circuit’s opinion—which comports with the Ninth Circuit’s approach but may conflict with the D.C. Circuits—compels courts to construe the government’s conduct as narrowly as possible when determining its nature. The Second Circuit’s approach, then, opens the doors of U.S. federal courts to contractual claims that are intimately connected with, but factually distinguishable from, sovereign conduct by foreign states. The opinion also elevates the importance of certain policy choices made by foreign states. For example, the Second Circuit’s opinion suggests that sovereign immunity would have applied if Argentina’s expropriation law explicitly prohibited its government from compensating the plaintiffs for their shares. This kind of legislative choice, which Argentina’s lawmakers likely did not know would open the country to litigation overseas, is now subject to scrutiny by U.S. courts.

It is debatable whether the Second Circuit’s application of the commercial exception is compatible with the FSIA or Supreme Court precedent. In any event, the Second Circuit’s ruling—which the Supreme Court declined to disturb—is now the law within its jurisdiction, including in the global financial center of New York. Weltover’s commercial “nature” test seems to have reached new heights.

The limited power of the act of state doctrine

Historically, the “act of state” doctrine has also shielded states from liability in U.S. courts. That doctrine, which dates back to the 1890s, holds that U.S. courts will not question the validity of public acts performed by other states within their borders. The doctrine is a creature of U.S. federal common law, not international law, and it stems from comity and separation of powers principles.

Argentina invoked the doctrine in this case, claiming that the plaintiffs’ argument would require a U.S. court to “sit in judgment” of the validity of Argentina’s sovereign act of expropriation. The district court disagreed, holding that the case turned instead on the operation of YPF’s bylaws in light of Argentina’s decision to expropriate. And Argentina’s official act of expropriation neither compelled it to renege on its obligation to issue a tender offer nor absolved it from its contractual obligations under the bylaws. The district court therefore declined to apply the doctrine, applying much the same logic as for the commercial exception: the expropriation and breach of contract were factually and legally distinct acts. (The Second Circuit declined to consider this issue on appeal.) The district court’s decision suggests that the act of the state doctrine may rise and fall along with the FSIA analysis in cases involving both sovereign and commercial activities.

U.S. civil litigation: less predictable and adaptable

As the legal landscape leaves sovereign states increasingly susceptible to being hauled into U.S. courts, investors may be emboldened to choose civil litigation over ISDS. This is a concerning prospect. Notwithstanding the critiques of ISDS—many of which have substantial force—the mechanism arguably has at least three benefits over U.S. civil litigation in the sovereign context.

The first is institutional competence. U.S. federal judges are generalists who are typically unfamiliar with foreign law and the sector-specific subject matter of sovereign contract cases.  While many cases involving foreign states so far have centered on a few major issues such as bond repayments, other cases have run the gamut from energy infrastructure to defense contracts.  In ISDS, parties can choose (at least one of) the arbitrators, allowing them to consider the technical and legal expertise of their adjudicators. Perhaps more importantly, ISDS cases usually turn on the interpretation of relatively standardized international treaties, while contract disputes are much more heterogeneous, often incorporating an array of foreign law. Where this is the case, judges will need to rely on the parties’ submissions. But the Supreme Court’s holding in Animal Science Products that U.S. courts need only afford “respectful consideration” to foreign states’ interpretations of their own laws—but are not bound by them—will give little comfort to sovereign defendants that their laws will be applied correctly in such suits. In contrast, when interpreting domestic laws, investor-state tribunals have historically looked to foreign domestic courts for assistance, acknowledging (¶ 176) that they are “likely to be of great help.” And, recently, investment treaties such as the EU-Canada Comprehensive Economic and Trade Agreement (Article 8.31(2)) have provided for mandatory arbitral tribunal deference to domestic court interpretations of foreign law.

Second, ISDS will often have more perceived legitimacy as a dispute resolution mechanism than U.S. litigation. This statement might seem surprising given recent pronouncements about the “legitimacy crisis” of investment arbitration. But investment arbitration is almost always explicitly authorized by treaty, contract, or national legislation, which grounds the procedure in state consent, a central principle of international law. In contrast, many contracts are silent on the issue of dispute resolution. The YPF by-laws, for example, contained no forum selection clause. If anything, the evidence suggested that Argentina had ruled out litigation in foreign courts: in the district court, Argentina’s lawyers pointed out that the 1993 prospectus promoting investment in YPF provided for exclusive jurisdiction in Argentinian courts. The fact that foreign sovereigns may face litigation abroad even where they have seemingly withheld consent undermines the legitimacy of the litigation process. Moreover, party appointment of arbitrators can shore up trust in the arbitration process and ensure that the state’s perspective is heard (Brekoulakis & Howard; Carter). Litigation before a U.S. federal judge, while arguably more impartial, lacks this guarantee of representation.

Third, ISDS agreements are more adaptable to states’ needs than investment contracts, especially when the latter are enforced through foreign litigation. Again, this might seem counterintuitive given the criticism of ISDS as an inflexible regime that unfairly advantages investors. But investment agreements help centralize both investor rights and carve-outs for sovereign regulatory authority, thus focusing drafters’ attention on these provisions and enabling recent reform efforts (see, e.g., Baltag, Joshi & Duggal; Broude, Haftel & Thompson). Investment contracts, on the other hand, tend to be much more fragmented and operate within a complex patchwork of local law. Of course, states can standardize those contracts, adding regulatory exceptions and forum selection clauses, and explicitly incorporating protective local laws. Indeed, an effort to reform investment contracts is currently underway. But this will be a slow process given the number and heterogeneity of contracts and the need to negotiate with individual investors, many with outsized bargaining power. And, as discussed above, there is no guarantee that U.S. courts will understand and apply these updated contracts and local laws as intended.

None of this is meant to deny important critical perspectives on ISDS. These include analyses showing that the regime lacks transparency, suffers from arbitrator bias and conflicts of interest, lacks consistency absent appellate review, impedes climate change reform, curtails state sovereignty, favors rich countries, and overwhelmingly benefits large investors—just to list a few. But as the discussion above shows, U.S. litigation is likely to fare worse along many of these dimensions. And reform of the U.S. judiciary is largely out of foreign states’ hands, in contrast to ISDS where states can, and do, push for reform.

These drawbacks to U.S. civil litigation risk generating tension between the U.S. and other states and encourage retaliation through reciprocal jurisdiction over U.S. firms in other countries. This is precisely the risk that the modern doctrines of sovereign immunity and act of state were designed to avoid. As recently as 2021 in Federal Republic of Germany v. Philipp (p.12), the U.S. Supreme Court emphasized that:

“We have recognized that United States law governs domestically but does not rule the world. We interpret the FSIA as we do other statutes affecting international relations: to avoid, where possible, producing friction in our relations with [other] nations and leading some to reciprocate by granting their courts permission to embroil the United States in expensive and difficult litigation.”

Until recently, these principles have meant that it was, in one commentator’s words, “almost impossible to sue a foreign government in U.S. courts.” That is no longer the case, at least for many contract-based disputes.


One scholar has aptly described ISDS as a system that “grafts public international law (as a matter of substance) onto international commercial arbitration (as a matter of procedure).”  Weltover and its progeny, including Petersen v. Argentina, encourage investors to pursue a system that grafts foreign commercial law onto U.S. civil litigation. This essay has sought to demonstrate why these developments are likely to be problematic for foreign states and, in turn, the U.S. government. If the impending tide of U.S. cases against foreign states materializes, Congress and the U.S. Supreme Court might decide to tighten the scope of the FSIA’s commercial exception. In the meantime, states and investors should pay close attention to how they draft their agreements.

*Matei Alexianu earned a J.D. from Yale Law School in 2023. He thanks Ali Hakim for his thoughtful feedback on this essay. All errors are his own.

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