The European financial crisis has cast shadows over not only banks and insurance companies, but also sovereign states. The debt crisis in Greece comes at a time when the global economy has already been severely affected by the 2008 financial and economic crisis. The solvency of states is increasingly becoming a focal point in relation to the crisis and how it is to be overcome.
Creditors face a difficult task when trying to enforce their claims against sovereign states. In particular, with respect to the enforcement of judgments, national courts usually show considerable reluctance in relation to, and rarely grant, enforcement measures relating to the assets of foreign states. In order to protect the sovereign activities of states, enforcement measures are permissible only in relation to assets serving commercial purposes, and not in relation to sovereign purposes. Where a state issues bonds in order to raise funds, and where that state waives state immunity, it has been questioned whether it is possible for creditors to obtain execution orders with regard to sovereign assets of this state. The Federal Supreme Court has now rendered another important decision in this context and has dealt with the international jurisdiction of German courts in execution proceedings against sovereign assets of foreign states. In this case, even a waiver of the debtor state's immunity under German law could not establish the jurisdiction of German courts for the granting of execution orders into sovereign claims.
The decision(1) concerned a case in which the applicant and judgment creditor – a holder of defaulted Argentinean bonds – obtained a third-party debtor execution order from the Wolfsburg Local Court against the republic of Argentina. By way of this order, the debtor's claims against German third-party debtors for the payment of tax and customs duties arising out of the delivery of turbines and medical technology, as well as components for the construction of cars and underground railways, were attached and transferred to the creditor.
In the view of the lower courts, the Wolfsburg Local Court had international jurisdiction to grant an enforcement order with respect to the claims at stake. As the debtor had no legal venue in Germany, the lower courts based this competence on Sections 828(2) and 23 of the Code of Civil Procedure, according to which a place of jurisdiction is established at the location of the assets and, in case of claims, at the seat of the (third-party) debtor. The lower courts found this to create a sufficient relation to the German territory and allowed the initiation of execution proceedings. Thereby, the tariff and tax claims – notwithstanding their sovereign character – were considered to be exempt from the state immunity of Argentina due to an extensive and irrevocable waiver clause in the bond terms.
In the appeal proceedings before the Federal Supreme Court, the view of the lower courts was rejected. Instead, the court denied the international jurisdiction of the German courts for the granting of execution measures on the grounds that their jurisdiction is restricted to assets situated on German territory. Irrespective of the seat of the third-party debtor in Germany, the debtor's tax and tariff claims were deemed to serve sovereign purposes and therefore to pertain to Argentinean territory (and not German territory). As a consequence, the general presumption that the local jurisdiction of a particular German court indicates – in the absence of special international agreements – the international jurisdiction of Germany was considered to be inapplicable in this case.
Due to this finding, the court had no need to decide further questions raised in the case. In particular, the court did not rule on the question of whether the bond terms were to be interpreted in a way that the scope of the debtor's submission to German jurisdiction included the submission to execution proceedings. Even though the debtor irrevocably confirmed in its bond terms that it waived its right to object to German jurisdiction and explicitly declared that final judgments would be binding and enforceable against the debtor, the court disregarded this choice of forum due to the exclusivity of jurisdiction in execution proceedings (in accordance with Sections 40(2)(2) and 802 of the Code of Civil Procedure).
This decision is in line with previous decisions on the execution of sovereign claims of foreign states. However, it exceeds previous decisions in one important aspect: the Federal Supreme Court based its ruling exclusively on the location of the sovereign claims without considering the waiver of state immunity. In a 2005 decision concerning execution proceedings against claims of the Russian Federation arising out of the granting of overflight and transit rights, the Federal Supreme Court had decided on the location of these sovereign claims only in conjunction with a statement on the limited scope of the waiver of state immunity.(2) The court thereby confirmed that a waiver of jurisdictional immunity does usually not involve a waiver of immunity from execution.
Thereafter, it became questionable whether German courts are competent to issue execution orders concerning sovereign claims in cases in which foreign states also waived their immunity from execution proceedings and accordingly accepted the jurisdiction of German courts in this particular regard. International legal practice suggests that states may also submit themselves to the jurisdiction of foreign courts or tribunals with respect to execution proceedings regarding sovereign claims. This position is reflected, for example, in the UN Convention on Jurisdictional Immunities of States and their Property which provides three exceptions from enforcement immunity:
- express consent by the affected state;
- property specifically earmarked for the satisfaction of the claim; and
- assets serving commercial purposes present in the forum state.(3)
Accordingly, in 2006, the Federal Constitutional Court explicitly stated that sovereign assets may be subject to enforcement measures if the respective debtor state had waived its immunity from execution. However, clauses explicitly waiving immunity from execution must be carefully examined as they are usually considered not to waive the diplomatic immunity of state assets and functions from foreign interference.(4)
The bond terms in the present case contained a clear stipulation of a waiver of state immunity from enforcement measures. This and the aforementioned decision of the Federal Constitutional Court notwithstanding, the Federal Supreme Court brushed aside the international law standards on waiving of state immunity. While the court implicitly accepted that foreign states may choose to waive immunity from execution with regard to their sovereign assets, it ruled – quite formally – that such a waiver does not affect the exclusivity of the provisions of the code on the place of jurisdiction in execution proceedings.
The Federal Supreme Court decision provides guidance on the contentious issue of the place of jurisdiction in execution proceedings against sovereign claims of foreign states. These claims are now attributed to the territory of the foreign state and not to the territory of the state in which the third-party debtor is domiciled. For the first time, the granting of an execution order has been denied solely due to the foreign location of sovereign claims and irrespective of any possible waiver of immunity from execution in the bond terms.
The decision makes it even more difficult to enforce judgments against foreign states. Creditors cannot rely on loan term stipulations and choice of forum agreements waiving state immunity rights in relation to them. While a waiver of immunity from enforcement measures is still possible, such a stipulation does not affect the location of sovereign claims against third-party debtors. Clauses waiving immunity from execution proceedings do not therefore establish the international jurisdiction of German courts for the enforcement of sovereign claims of foreign states against third-party debtors domiciled in Germany. In order to obtain execution orders with regard to sovereign claims, creditors will thus be forced to initiate proceedings before the courts of the debtor state itself.
Due to these difficulties, creditors would be well advised to find state assets serving commercial purposes or to insist on the earmarking of property 'designated' for enforcement. In these cases, enforcement measures are internationally well accepted. Beyond that, the current European debt crisis may offer some new possibilities for creditors, especially with respect to the qualification of state property as serving commercial rather than sovereign purposes. This is because the crisis triggered a process of further deregulation and privatisation of traditional state functions. In turn, such a process may also lead to an increase of state assets serving commercial purposes which are available for the enforcement of claims arising from defaulted government bonds.
For further information on this topic please contact Christian Eli or Roland Kläger at Clifford Chance LLP by telephone (+49 69 7199 1487) or email ([email protected] or [email protected]).
(1) Federal Supreme Court, Decision VII ZB 120/09, November 25 2010, published in NJW-RR 2011, p647.
(2) Supreme Court, Decision VII ZB 9/05, October 4 2005, published in NJW-RR 2006, p198.
(3) Article 19 of the UN Convention on Jurisdictional Immunities of States and their Property, adopted by the UN General Assembly on December 2 2004, 59th Session Supp 22 (A/59/22), Annex I.
(4) Federal Constitutional Court, Decision 2 BvM 9/03, December 6 2006, published in NJW 2007, p2605.