July 16 (Reuters) - Iraq is not liable for the end of two oil-for-food contracts dating from the Saddam Hussein regime, a divided U.S. federal appeals court ruled in a decision that could make it harder to pursue contract claims against countries asserting sovereign immunity.
The 9th U.S. Circuit Court of Appeals in California said Iraq's current government deserves protection under the Foreign Sovereign Immunities Act of 1976 because the case did not involve "legally significant" U.S. commercial activity.
Monday's decision comes as a growing number of federal judges more closely scrutinize whether plaintiffs may pursue cases in U.S. courts to address wrongdoing outside the country.
The case involved a 2003 lawsuit stemming from a decision by an Iraq state-owned oil company to cancel contracts to sell 5 million barrels of oil to two Cyprus-based companies owned by Manuel Terenkian, a U.S. citizen.
These contracts were among those allowed under the United Nations Oil for Food Program, which let Iraq sell oil to finance the purchase of tens of billions of dollars of food, medicine and other goods for citizens hurt by international trade sanctions.
Terenkian said the state oil company canceled the contracts with his companies Marblearch Trading Ltd and Pentonville Developers Ltd after he refused to pay bribes, and sued to recover the loss of more than $6.25 million of fees.
Invoking the commercial activity exception to sovereign immunity under the 1976 law, he said Iraq should be held liable because New York was where the contracts were signed and from where the Oil for Food Program was run, and because some oil was destined for and was to be paid for in the United States.
But in reversing a 2010 ruling by a Los Angeles federal judge, the 9th Circuit said it would be improper to hold Iraq's current government liable for wrongdoing, saying the contracts lacked sufficient links to the United States.
"Although we may decry the practices conducted by the regime of Saddam Hussein, we best serve our nation's principles of equity and justice by applying the law in a fair and even-handed manner to all parties before us," Circuit Judge Sandra Ikuta wrote for a 2-1 majority.
Edward Vaisbort, a lawyer for the plaintiffs, said his clients are disappointed and evaluating their options. He noted that Iraq has taken an opposite position in separate litigation in a New York federal court, and is seeking to recover damages related to what it called Hussein's kickback scheme.
"Iraq shouldn't have the benefit of being able to litigate in one court, without the burden of having to defend against claims over similar activity in another court," said Vaisbort, a partner at Litchfield Cavo in Los Angeles.
Edward Powers, a partner at Zukerman Gore Brandeis & Crossman representing Iraq, said he is gratified by Monday's decision.
Circuit Judge John Noonan dissented from the decision, saying "there is nothing specifically sovereign about bartering oil," and that the majority misapplied earlier cases that had found Argentina and Nigeria liable for U.S. commercial activity.
"In order to protect its treasury the Republic of Iraq has chosen to step into the shoes of the wretched regime that once ruled the country," he wrote. "Equities may discourage us from stretching beyond precedent to find reasons for letting Iraq off the hook."
The case is Terenkian et al v. Iraq, 9th U.S. Circuit Court of Appeals, No. 10-56708. (Reporting By Jonathan Stempel in New York; editing by Gunna Dickson)