The Ninth Circuit Court of Appeals has ruled that a contract between Exportadora de Sal, S.A. de C.V. (ESSA), and Packsys, S.A. de C.V. (Packsys) is not binding because it was not agreed to by ESSA's board of directors.
ESSA is a majority-owned subsidiary of the Mexican government, and one of the world’s largest producers of salt. The plaintiff, Packsys, is a Mexican manufacturing organization, whose primary products are packaging materials and machinery. Packsys alleged that ESSA breached a multi-billion dollar contract over several decades to sell residual salt brine, a lucrative byproduct of ESSA’s salt production. ESSA’s former General Director executed this contract, himself, without ESSA Board approval. Packsys’ core argument was that ESSA was bound to the contract as its General Director had entered into the contract on his company’s behalf.
The Ninth Circuit Court’s ruling on a November 8, 2017 hearing upheld an earlier dismissal by a Los Angeles federal district court, which concluded that ESSA was a “foreign state” under the Foreign Sovereign Immunities Act (FSIA) and, therefore, immune from jurisdiction. The federal district court agreed with O’Melveny’s argument that ESSA was immune without exception because ESSA’s former General Director had acted without authority. Under Mexican law, he was required to obtain authorization from ESSA’s Board of Directors, as required by Mexican law.
Agreeing with O’Melveny’s argument, the Ninth Circuit Court wrote: “Mexican law required ESSA’s Board to authorize or approve the Packsys contract, but the board did not do so.” Instead, ESSA’s then-General Director Jorge Lopez Portillo Basave (Portillo) presented the Board with a proposal it did not approve.
“Therefore, Portillo lacked actual authority to execute the contract. And because the contract was not executed with actual authority, it cannot serve as the basis for applying either the FSIA’s commercial activity exception or its waiver exception…. The district court correctly concluded that the FSIA bars this suit.”