Summary: The article underlines the challenges parties might face when seeking to enforce and execute arbitral awards against States or State entities. Whilst Foreign States in most jurisdictions, are granted certain immunities when proceedings are brought against the State before courts of another State, in this article we highlight the limits of such immunity. Another crucial argument that might be brought up by States, is that the State entity party to an arbitration agreement, did not have the power to arbitrate on behalf of the State. Additionally, there are a number of procedural formalities parties might face when seeking for enforcement, including limitation periods for enforcing awards discussed in this article.
When a non-state party wins a case, enforcing and executing an arbitral award against a State or a State entity could cause drawbacks. Under the lex fori, the New York Convention expressly states the obligation imposed upon Contracting States to enforce foreign arbitral awards and recognize such awards as binding. Whilst giving States the freedom to regulate the domestic procedural mechanisms.
Article V of the New York Convention, in regards to refusing recognition and enforcement of foreign awards, does not implicitly refer to State immunity. Nevertheless, we may refer to the grounds enshrined in Article III stating the following: “Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon…”.
Additionally, parties seeking such enforcement and recognition may rely on Article VII(1) of the Convention providing: “The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon”.
The doctrine of State immunity from execution is not mandatory, thus States are free to waive such immunity. For that reason, to avoid States from refusing enforcement and recognition of an award rendered against it, arbitration agreements should explicitly contain waiver of state immunity.
Foreign States in most jurisdictions, are granted certain immunities when proceedings are brought against the State before courts of another State. In England, the State Immunity Act of 1978 provides state immunity from execution subject to two exceptions: (1)Where there is a written consent to execution; (2) Where State property is used for commercial purposes. In the United States, Foreign State immunity from suit in US courts, whether Federal or State, are set out in the Foreign Sovereign Immunities Act (FSIA) of 1976.
Section 1602 of the FSIA provides: “The determination by United States courts of the claims of foreign States to immunity from the jurisdiction of such courts would serve the interests of justice and would protect the rights of both foreign States and litigants in United States courts. Under international law, States are not immune from the jurisdiction of foreign courts insofar as their commercial activities are concerned, and their commercial property may be levied upon for the satisfaction of judgments rendered against them in connection with their commercial activities. Claims of foreign States to immunity should henceforth be decided by courts of the United States and of the States in conformity with the principles set forth in this chapter”.
Contrary to many jurisdictions, there isn’t a provision in the French law providing for foreign States from jurisdictional immunity. Therefore, the rules governing state immunity are found in case law. In Levant Express Transport v Railways Administration of the Iranian Government, the Cour de cassation (Court of Cassation) on the 25th of February 1969 defines the limits of immunity, stating: “Foreign States and organizations acting on their behalf or at their discretion enjoy immunity from jurisdiction only insofar as the act which gives rise to the dispute constitutes an instrument of public authority or was carried out in there interest of a public service”. Consequently, the rail transport constituted a commercial instrument that is not dependent upon a soverign act, thus the administrative authority (the railways administration) could be tried in court.
As a result of an ICC award, on the 20th of June 1996, the Rouen Court of Appeals in its decision in Bec Frères v. Office des céréales de Tunisie held that: “By entering into an arbitration agreement, in the absence of which the deal would clearly not have been concluded, the Tunisian State has thus accepted the ordinary legal rules of international trade; by doing so, it has waived its immunity from jurisdiction and, as agreements must be performed in good faith, its immunity from execution”.
Additionally, another decision rendered on the 6th of July 2000 by the Paris Cour de cassation in Creighton Ltd v. Qatar had the merit of recognizing State immunities. However, the Paris Court of Appeals overruled the decision of restoring the State’s assets seized in France that was an outcome of an ICC award. The Cour de cassation held that: “The obligation entered into by the State by signing the arbitration agreement to carry out the award according to Article 24 of the International Chamber of Commerce Arbitration Rules [now Article 28(6) of the Rules in force as of January 1, 1998] implies a waiver of the State’s immunity from execution”.
As a result, when a sovereign State signs an ICC or similar arbitration clause, it waives its immunity from execution of the arbitral award. The Cour de cassation ruled against the State, distinctly demonstrating that arbitral awards against a State that has given its consent to arbitrate should not be rendered ineffective, thus having an unsuccessful outcome simply because the State benefits from immunity from execution.
Accordingly, the nature of the act determines granting such immunity. As a result jurisdictional immunity covers soverign acts, and not commercial acts. Which was expressly stated by the Cour de cassation in a decision rendered in 2003: “Foreign States and entities that constitute their emanations will benefit from jurisdictional immunity only if the act giving rise to the dispute, by its nature or by its purpose, participates in the exercise of that state’s sovereignty, and thereby is not a commercial act”.
A crucial argument that might be brought up by States, is that the State entity party to an arbitration agreement did not have the power to arbitrate on behalf of the State. This argument conveys grounds of incapacity. This issue was raised in Svenska Petroleum Exploration AB v Lithuania & Anor. Svenska. Svenska, a Swedish company entered into a joint venture agreement with a Lithuanian State-owned entity. The arbitration agreement was governed by the Lithuanian law whilst providing for arbitration in Denmark under the rules of the ICC. The agreement included an irrevocable waiver of all sovereign immunity rights by the Lithuanian government and the State-owned entity.
The Lithuanian government demonstrated its intention in writing to be bound by the agreement as the government was a signatory, even when the government was not a party to the said agreement. The Lithuanian State-owned entity was then privatized, thereby when a dispute arose, Svenska referred to arbitration for interim measures against both the Lithuanian government and the newly privatized entity. The arbitral tribunal’s interim award held that the Lithuanian government was obliged by the arbitration agreement and the tribunal had jurisdiction over the dispute.
The final award rendered was in favor of Svenska, the Swedish petroleum company. Svenska acquired an order admitting enforcement of the final award in the United Kingdom. When the Lithuanian government applied to set aside the award on the grounds of sovereign immunity the High Court refused. The Court of Appeal concluded by examining the parties' intention, and further held that under Section 9 of the UK State Immunity Act of 1978, a State is not immune in UK court proceedings relating to arbitration when it has agreed to arbitrate in writing. The Court as a consequence concluded that the Lithuanian government was not immune from the enforcement proceedings.
Moreover, there are a number of procedural formalities parties might face when seeking enforcement. One of these formalities are limitation periods for enforcing awards. If either party fails to apply for enforcement within the limitation periods, enforcement proceedings shall be time barred. Also a party seeking enforcement against a State would commonly seek enforcement in a number of jurisdictions.
Limitation periods notably differ from one jurisdiction to another. For example, in China the limitation period for enforcement in the past was six months, however the limitation period has been extended to two years. In France, the limitation period for enforcement is five years. In England, the limitation period for enforcement is six years. In contrast, in the Kingdom of Bahrain there is no clear case law identifying the limitation period applicable to recognition and enforcement of foreign awards.
Acquiring a favorable arbitral award is not enough, especially when the losing party fails to honor the award rendered. Thus the party in which the award is in its favor will need to seek intervention from domestic courts for enforcement, commonly in a number of jurisdictions. The effectiveness of arbitral awards arises from the parties expectations and intention to have agreed to resolve their disputes through arbitration. Therefore, when an arbitration agreement is entered by a State or a State entity and a private party, the agreement to arbitrate would not have value if the State at its own discretion could decide whether the arbitral award rendered against it would be enforced, by exercising its immunity.
First Published in the ICC Institute Newsletter - Issue 15.