The availability of effective relief is a key concern for any business involved in litigation or arbitration. Where a dispute has arisen as a result of dealings with a State or a State-owned entity, it is essential that businesses are aware that the principles of sovereign immunity (sometimes referred to as State immunity) may apply.
Sovereign immunity has two main facets: firstly, it may be invoked to enable a State or a State-owned entity to avoid the jurisdiction of courts or arbitral tribunals. This means that those courts or tribunals may not have power to hear the dispute. Secondly, sovereign immunity may insulate the assets of a State or State-owned entity from enforcement, meaning that even if judgment is successfully obtained against them, a non-State party may be unable to obtain effective relief.
With respect to immunity from jurisdiction, in most cases an agreement to arbitrate constitutes a waiver of that immunity, both in relation to the arbitral proceedings themselves and any ancillary proceedings in the national courts. However, with respect to enforcement, often neither the fact that a State is a party to an arbitration agreement nor membership under the New York Convention on the Enforcement and Recognition of Foreign Arbitral Awards or the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States will, of itself, necessarily constitute a waiver of the right to immunity from execution. As a result, State parties are far better equipped to resist arbitral awards than their commercial counterparts.
Given the potential ramifications for non-State parties in disputes where the doctrine of sovereign immunity is deemed to apply, it is important that such parties consider the laws of each jurisdiction in which they operate. This is not always a straightforward task. The cases discussed below provide a snapshot of some of the recent activity in this area, illustrating the discrepancies in the way the doctrine operates between jurisdictions and the need for companies to carefully consider sovereign immunity principles when transacting with States or State-owned entities.
The scope of sovereign immunity in Australia was recently considered by the High Court and Federal Court of Australia in proceedings concerning the Australian Competition and Consumer Commission (ACCC) and PT Garuda Indonesia Ltd (Garuda), an Indonesian State-owned entity. Under Australian law, foreign States and ‘separate entities’ of foreign States are immune from the jurisdiction of the Australian courts, subject to a number of exceptions, including where the proceedings concern a commercial transaction, contract of employment or personal injury. In 2009, the ACCC commenced proceedings against a number of airlines, including Garuda. Garuda challenged this action, claiming sovereign immunity. The key issues were:
- whether Garuda was a separate entity, which would entitle Garuda to invoke sovereign immunity, and
- whether the conduct alleged by the ACCC concerned a commercial transaction, which would prevent the application of principles of sovereign immunity.
The Full Court of the Federal Court held that Garuda was a separate entity under Australian law and, therefore, it was entitled to immunity. The Court considered for an entity to be deemed a ‘separate entity’, it must be an agency or instrumentality of the foreign State, which will largely depend on ‘whether that body is carrying out the foreign State’s functions or purposes.’ In assessing this question, regard should be had to:
- the ownership and control of the entity
- the functions performed by the entity, the foreign State’s purposes in supporting the entity, and
- the manner in which the entity conducts itself or its business.
In Garuda’s case, factors leading to the Court’s conclusion that it was a separate entity included Indonesia’s substantial shareholding (95.5%, with the remaining shares held by corporations controlled by the Indonesian Government) and the fact that all of Garuda’s shareholders were governed by Indonesian State ownership laws. By contrast, the Court held that Malaysian Airline System Berhad, another airline involved in the proceedings, did not meet the definition of separate entity, as it was a public, listed company with private shareholders.
Notwithstanding Garuda’s prima facie entitlement to claim sovereign immunity, the Full Court found that the conduct alleged by the ACCC fell within the ‘commercial transaction’ exception, preventing Garuda from relying on the immunity. The Court considered that the term ‘commercial transaction’ should be construed broadly and could extend to alleged breaches of competition law, including to commercial activities of an entity acting ‘in the manner of a private player within the market.’
The High Court affirmed the decision, stating that the application of the exception is not limited to private parties to the transaction or to contractual disputes.
In a series of related judgments, the French Supreme Court recently extended the application of particular rules relating to the scope of sovereign immunity in the context of an express waiver given by a State. The case built upon the principles enunciated in related proceedings in 2011, which determined that, for a waiver of sovereign immunity to extend to the diplomatic assets of a State, the waiver has to expressly and specifically provide for such.
In March 2013, the French Supreme Court considered the position where an entity sought to execute a judgment against non-diplomatic assets used for public purposes (monies owed by French companies to Argentina, constituted by tax and social revenues) in circumstances where Argentina had purportedly waived, in writing, its right to State immunity.
The Court held that a waiver in respect of public assets, as with assets used for diplomatic purposes, must be express and specific in describing the particular goods, or class of goods, in relation to which the waiver is granted. Since the purported waiver was not express and specific, Argentina had not waived its immunity from execution of the relevant claims against those assets.
In another recent case, the Singapore Court of Appeal considered a claim by the Maldives Government and a company wholly-owned by the Maldives Government that an injunction should not have been granted against them because it contravened principles of sovereign immunity.
Although the Court of Appeal ultimately set aside the injunction on other grounds, it rejected the claim for sovereign immunity and found that it had jurisdiction to grant an injunction. In reaching this conclusion, the Court of Appeal had particular regard to the fact that:
- the underlying agreement between the parties effectively contained a waiver of sovereign immunity, and
- the acts in question were not done in the exercise of the State’s sovereign power but, rather, the dispute was properly characterised as one of private law, to which private law remedies applied and, therefore, sovereign immunity was not available.
A recent German case considered whether the Government of Thailand was immune from the jurisdiction of German courts.
The relevant acts of the Thai Government which led to the dispute were properly characterised as sovereign, or public, in nature, rather than commercial dealings. Thailand could not, therefore, be prevented from relying on principles of sovereign immunity on that basis.
To determine whether the Thai Government could in fact invoke sovereign immunity, the Supreme Court considered whether such immunity had otherwise been waived.
The Court held that:
- a party will only be taken to have waived sovereign immunity where circumstances clearly evidence an intention to do so by that party, and
- the fact that an initial arbitral award as to jurisdiction has not been appealed by a State party is not relevant to the question of waiver, nor will it prevent that party from claiming sovereign immunity in subsequent proceedings.
The case was remitted to a lower court to determine whether the waiver in question in fact applied, given the nature of the dealings between the parties.
Sovereign immunity was also considered in cases before United Kingdom courts last year. In one such case, the Privy Council considered whether La Generale des Carrieres et des Mines Sarl (Gecamines), a corporation owned by the Democratic Republic of Congo (DRC), was directly liable for debts which the DRC owed to F.G Hemisphere Associates LLC (Hemisphere).
In finding that Gecamines was not an organ of the State, the Privy Council held that there was a presumption that the State-owned corporation was a separate entity and that this presumption should only be displaced in ‘quite extreme circumstances’. In another case, the Supreme Court of the United Kingdom provided guidance on when property is ‘for the time being in use or intended for use for commercial purposes’ (an exception to sovereign immunity under United Kingdom legislation).
The property in question was deemed not to be in use for a commercial purpose. In reaching this conclusion, the Court considered the construction of the commercial purposes exception to sovereign immunity, deciding that, (1) the origin of the property against which execution is sought, and (2) whether the property has been used for commercial purposes in the past, are irrelevant. The Court noted that this exception is narrower in wording than other provisions of United Kingdom legislation governing sovereign immunity, which refer to proceedings ‘relating to’ or ‘in connection with’ a commercial transaction.
This survey of cases demonstrates the uncertainty surrounding the practical recognition and application of sovereign immunity in many jurisdictions.
In light of the vigour with which States and State-owned entities are seeking to resist enforcement proceedings, it seems sensible to seek, where possible, an express waiver of immunity from jurisdiction and enforcement, in terms which are as specific as possible. It is important to ensure that the waiver is effective both in the jurisdictions in which enforcement may be sought and under the domestic laws of the State party.
At a minimum, it is essential that companies engaging in cross-border transactions or business involving States or State-owned entities consider the issue of sovereign immunity and the way in which it may limit the protection and relief they might otherwise be afforded.
A version of this article was published on the Kluwer Arbitration Blog.