The U.S. Supreme Court Sent a Wake-up Call to Development Banks. Will They Listen?

The U.S. Supreme Court Sent a Wake-up Call to Development Banks. Will They Listen?
The International Finance Corporation building in Washington, DC, June 12, 2019 (AP Photo byPatrick Semansky).
The shallow waters of the Gulf of Kutch, an inlet of the Arabian Sea along the northwestern coast of India, are ideal for fishing, with coral reefs and mangrove forests that provide breeding grounds for a diverse array of marine life. On the gulf’s northern coast, near the town of Mundra, the gently sloping seabed and calm tides make it easy to catch local delicacies like prawns, pomfret and a type of lizardfish known colloquially as “Bombay duck.” The Waghers, a Muslim minority group, have fished these waters for generations. They maintain permanent inland villages, but from September until May, many Waghers erect temporary settlements along the coast. From there, they venture out to fish in small boats and on foot, and their catch is dried, processed and sold to local traders. “It is their skill with using nets that is believed to give the Waghers their name,” Bangalore-based author Srinath Perur wrote in 2016. It derives, he explained, “from the exclamation wah and gher, meaning ‘well laid out’ or ‘well surrounded’ in Kutchi,” which is widely spoken in that region of Gujarat state. In recent decades, this centuries-old way of life has been increasingly threatened by industrial development projects along the coast. These include the Tata Mundra Ultra Mega Power Project, a gigantic, 4,150-megawatt coal-fired power plant that was financed in part with a $450 million loan from the International Finance Corporation, or IFC, an arm of the World Bank. Since reaching full generation capacity in 2013, the Tata Mundra plant has provided power to 16 million people in five states. Unfortunately, it has also created a host of problems for the Waghers, who complain that discharges of hot water from the plant’s outfall channel have altered the nearby marine habitat and reduced fish stocks. The groundwater is no longer fit to drink. Coal dust and ash from the plant sickens the villagers and contaminates fish that have been laid out to dry. “The joy has gone away,” Budha Ismail Jam, a local Wagher fisherman who lives near the plant, told The Nation magazine last year. In 2011, a group representing Wagher communities filed a complaint with the IFC’s internal compliance mechanism, which found that the IFC had failed to meet a number of its own environmental and social safeguards for the project. When the IFC failed to take corrective action, the fishermen filed a lawsuit in U.S. federal district court in 2015. Lower courts found that the IFC was immune from the suit under U.S. law, but the case was appealed to the Supreme Court, which rejected the IFC’s claim of immunity. In a 7-1 decision announced last month, the court found that development banks and international financial institutions may be held accountable under U.S. law for the adverse consequences of projects they back overseas. While that decision sounds momentous, there are a number of important caveats. First, the case was decided on the narrow legal question of how to interpret the International Organization Immunities Act, or IOIA, a 1945 U.S. law that grants international organizations like the World Bank “the same immunity from suit… as is enjoyed by foreign governments.” In 1945, this constituted absolute immunity from any type of legal claim. But the concept of immunity as understood by American legal scholars rapidly evolved, and in 1952, the State Department announced that it would take a more restrictive view of immunity, carving out an exception for a foreign government’s commercial activities. This interpretation was later codified by Congress in the 1976 Foreign Sovereign Immunities Act.

Strengthened internal accountability measures are in the interests of development banks, which do not want to be in the position of frequently litigating cases in U.S. courts.

The IFC argued that international development banks should receive absolute immunity based on the IOIA, partly because their activities are inherently commercial, so applying restrictive immunity would subject them to an onslaught of foreign-plaintiff litigation and divert resources from their important missions. That was also the primary concern of eight former secretaries of the treasury and secretaries of state, who filed an amicus brief in support of the IFC. But the court found those worries to be exaggerated, noting that in reality, many international organizations, including the United Nations and the International Monetary Fund, specify absolute immunity from any kind of judicial proceedings in their charters. The IFC does not, but the court argued that “it is not clear that the lending activity of all development banks qualifies as commercial activity.” Even if it does, potential plaintiffs must meet other standards laid out in the Foreign Sovereign Immunities Act, including that the activity has a “sufficient nexus to the United States.” Development experts and international legal scholars agree that the IFC’s case was unduly alarmist. “This ruling has opened the door a little bit,” says Vijaya Ramachandran, a senior fellow at the Center for Global Development. But, she adds, “we don’t really know whether this is going to lead to a flood of lawsuits.” A key indicator for other prospective plaintiffs will be the outcome of the Tata Mundra case, which will now go back to lower courts for further litigation. Whether courts agree that a loan to the Tata Mundra Ultra Mega Power Plant project has “sufficient nexus to the United States” is unclear, but lawyers for Earthrights International, the advocacy group that represented the Indian plaintiffs, believe they have a good chance of success. At least one other case, involving farmers in Honduras who say that an IFC-supported company used death squads to terrorize them and dispossess them of their land, is likely to move forward as a result of last month’s ruling. While the legal uncertainties are being worked out, observers like Ramachandran say that the IFC and other lenders should take this case as a wake-up call to completely revamp their accountability mechanisms so that they become binding in similar cases going forward. “That currently doesn’t exist, and I think that is the reason the IFC is in this mess,” she says. In practice, that would mean creating an internal ombudsman that can force project management personnel to take corrective actions instead of merely issuing reports. A strengthened internal accountability mechanism would provide an easier avenue to redress grievances by adversely affected communities, many of whom do not have the resources to pursue legal action in the U.S. But Ramachandran stresses that it is also in the interest of the IFC, which does not want to be in the position of frequently litigating cases in U.S. courts. “Given this ruling, they are probably thinking about it,” she says. “The organization wants to get this right, so I do think they will undertake some steps to carry out reforms.” Elliot Waldman is the associate editor of World Politics Review.

Keep reading for free!

Get instant access to the rest of this article by submitting your email address below. You'll also get access to three articles of your choice each month and our free newsletter:

Or, Subscribe now to get full access.

Already a subscriber? Log in here .

What you’ll get with an All-Access subscription to World Politics Review:

A WPR subscription is like no other resource — it’s like having a personal curator and expert analyst of global affairs news. Subscribe now, and you’ll get:

  • Immediate and instant access to the full searchable library of tens of thousands of articles.
  • Daily articles with original analysis, written by leading topic experts, delivered to you every weekday.
  • Regular in-depth articles with deep dives into important issues and countries.
  • The Daily Review email, with our take on the day’s most important news, the latest WPR analysis, what’s on our radar, and more.
  • The Weekly Review email, with quick summaries of the week’s most important coverage, and what’s to come.
  • Completely ad-free reading.

And all of this is available to you when you subscribe today.