The growing participation of States (sovereigns) in the global marketplace means that private parties are increasingly dealing with sovereign counterparts that claim a special legal position under municipal and/ or international law. Private parties will need to address this special position upfront in any contract, lest they find themselves with empty hands in the event of a dispute.

When dealing with sovereign parties—which may include the State/Government itself, a municipality, a State organ, a State agency or a State-owned company—private parties should secure remedies that are both available and enforceable.

The time for ensuring the availability of remedies is during the contract negotiations phase, and the place to secure them is the contract between the private party and the sovereign party. Private parties should focus on two clauses in any contract with a sovereign party: the arbitration clause and the waiver-of-immunity clause.

The Arbitration Clause

A private party contracting with a sovereign counterpart should first ask itself: Is recourse available against the sovereign party? Assuming the private party does not wish to submit any dispute with the sovereign party to the courts of a particular country, international arbitration offers the best alternative for effective dispute resolution. This raises the following question: Does the private party have a valid arbitration agreement with the appropriate party?

In practice, there are multiple options for dispute resolution away from the courts of a given country, ranging from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) (available only for disputes arising directly out of an “investment” between a State party to the 1966 ICSID Convention and a national of another State party to that Convention) to ad hoc arbitration.

There is, however, only one arbitration institution offering special rules for dealing with private-sovereign disputes of whatever kind, i.e., disputes relating to either investments or ordinary commercial contracts, and that is the Permanent Court of Arbitration (PCA) in The Hague.

For more information about the PCA, go to The country concerned must have ratified one of the PCA’s constituent instruments and must also have given consent to PCA arbitration in a separate document, typically the contract between the private party and the sovereign party. The PCA recommends the following standard submission clause for private-sovereign disputes: If any dispute arises between the parties as to the interpretation, application or performance of this contract, including its existence, validity or termination, either party may submit the dispute to final and binding arbitration in accordance with the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between Two Parties of which Only One Is a State, as in effect on the date of this contract.

While they offer no special rules for disputes involving sovereign parties, all the major arbitration institutions routinely deal with private-sovereign disputes. Arbitration agreements with sovereigns should include a fall-back agreement worded as follows:

In the event that, for any reason, [arbitration institution A] or any tribunal operating under its auspices denies jurisdiction with regard to any dispute, then the parties select arbitration according to the rules of [arbitration institution B].

Whatever form of arbitration is selected, the contracting parties should seek the advice of experienced arbitration counsel in adopting changes to the standard clause recommended by each arbitration institution.

Another point to consider is that, even where recourse is available, an arbitral award obtained against a sovereign party might not be enforceable, leaving the private party ultimately empty handed. An award against a sovereign party is useless if there are no courts willing to give effect to the award, or if there are no assets available for enforcement. Private parties should therefore ensure that the country of the sovereign party and, if appropriate, of the place of arbitration and the other party’s assets, have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, or other treaties offering similar guarantees. The place of arbitration should be outside the country of the other contracting party.

A private party dealing with a sovereign counterpart can further optimise its legal position by insisting that the law of a jurisdiction, which is known to be favourable to private parties and to arbitration generally, govern the rights and obligations of the parties to the contract. The chosen law should make it difficult for sovereign parties to escape their contractual promises by invoking their municipal laws or their immunity.

The Waiver-of-Immunity Clause

Enforceability does not merely depend on the availability of an international treaty regulating recognition and enforcement of foreign arbitral awards or protecting foreign investment. Sovereign parties often invoke immunity to shield their assets against enforcement based on an award obtained by a foreign party. Thus, every contract with a sovereign party should include a comprehensive waiver-of-immunity clause (see box) that accompanies the dispute resolution clause in the contract.

Private parties should check whether the sovereign party has the requisite authority to waive immunity. The sovereign party should reaffirm elsewhere in the contract its capacity to enter into the waiver clause. Special attention should be paid to the procedures which must be followed under the sovereign party’s municipal law in order to make the waiver valid and binding upon that party. A contractual acknowledgment should prevent the sovereign party from claiming procedural irregularities later. Finally, the clause defining the parties to the contract should clearly describe the entities covered by the contract.


When contracting with sovereign counterparts, private parties should focus on any clauses addressing the special legal position which their counterparts may claim under applicable law. In order to avoid unpleasant surprises after the contract’s conclusion, particular attention should be paid to:

  • The arbitration clause, including the place of arbitration
  • The waiver-of-immunity clause, especially immunity from execution
  • The sovereign party’s authority to agree to a particular clause
  • Formalities pertaining to the validity of any clause affecting the sovereign party’s legal position
  • Clauses defining the contracting parties

Waiver of Immunity

To the extent that [Sovereign Party] may in any jurisdiction claim for itself or any of its revenues, assets or properties immunity from service of process, suit, jurisdiction, execution, discovery relating to any issue of immunity, attachment (whether in aid of execution, prior to judgment or award or otherwise) or other legal or judicial process or other remedy, and to the extent that in any such jurisdiction there may be attributed to [Sovereign Party] or any of its revenues, assets or properties such immunity (whether or not claimed), [Sovereign Party] hereby irrevocably and unconditionally agrees not to claim and hereby irrevocably and unconditionally waives any and all such immunity to the fullest extent now or hereafter permitted by the laws of such jurisdiction.

Without limiting the generality of the foregoing, [Sovereign Party] consents generally for the purposes of the State Immunity Act of 1978 of the United Kingdom to the giving of any relief or the issue of any process and agrees that the waivers set forth in this clause shall have the fullest scope permitted under the Foreign Sovereign Immunities Act of 1976 of the United States of America (the Act) or the sovereign immunity law of any other relevant jurisdiction and are intended to be irrevocable for purposes of such Act or such law, as the case may be. The parties hereto agree that this Agreement and the transactions contemplated hereunder constitute a private and commercial act.