SerVaas Incorporated v Rafidain Bank and Others1

The Supreme Court’s decision concerned the scope of a state’s immunity from execution of a judgment under section 13(4) of the State Immunity Act 1978 (SIA) and has confirmed that, when determining whether to apply the “commercial purposes” exception to state immunity, the origin of the property against which execution was sought is irrelevant, even if it was commercial.

Background

The issues in the appeal were not concerned with a state’s immunity from suit, which is governed by section 3 of SIA, but was solely concerned with the scope of its immunity from execution of a judgment given against it, which is governed by section 13(2)(b) and 13(4) SIA. Those sections provide as follows:  

5. Section 13(2)(b): “[Subject to subsection (4)] the property of a State shall not be subject to any process for the enforcement of a judgment or arbitration award or, in an action in rem, for its arrest detention or sale.”  

6. Section 13(4): “Subsection (2)(b) above does not prevent the issue of any process in respect of property which is for the time being in use or intended for use for commercial purposes; …”  

Facts

SerVaas, a company incorporated in Indiana, brought proceedings against the Iraqi Ministry of Industry in Paris in relation to a commercial agreement and obtained judgment in default. SerVaas sought to enforce that judgment in England and Wales by applying for a third party debt order over sums payable to Iraq by Rafidain Bank under a scheme of arrangement. Rafidain was in liquidation in England and Wales and was due to pay significant sums to Iraq as part of a restructuring of debts which had accrued during the Saddam Hussein regime. The debts originally arose from commercial transactions between Rafidain and its commercial creditors, but had since been transferred to Iraq.  

The Head of Mission of the Embassy of Iraq in London signed a certificate stating that Iraq intended to direct the distribution to the UN Development Fund for Iraq (DFI) and was not in use, or intended for use by or on behalf of the state of Iraq for any commercial purpose. The certificate, under section 13(5) of SIA, was sufficient evidence that the debt was not to be used for commercial purposes unless SerVaas could prove otherwise. The fact that the distribution was intended for the DFI meant that it was common ground that the debts were intended for use for sovereign and not commercial purposes.  

The lower courts had refused the third party debt order stating that SerVaas had no real prospect of rebutting the presumption created by the certificate and holding that the origin of the debts was irrelevant when determining whether the current use was for commercial purposes.

The key question before the Court was whether the debts were “property which is for the time being in use or intended for use for commercial purposes” in section 13(4) of SIA and in particular whether the nature of the origin of the debts is relevant to the question of whether the property was in use for commercial purposes. SerVaas’ position was that the nature of the transaction which gave rise to Rafidain’s liability was entirely commercial given that Rafidain was a commercial bank and the debts had originally arisen from commercial transactions between Rafidain and its commercial creditors.  

Decision

The Supreme Court unanimously held that the commercial purposes exception to state immunity did not apply on the facts of this case, and so dismissed the appeal against the decision upholding immunity from execution.  

The Supreme Court agreed with the reasoning in the Court of Appeal and held that the origin of the debt was irrelevant when deciding whether the property was in use for commercial purposes. Lord Clarke gave the leading judgment and concluded that the language of section 13(4), in particular the expression “in use for commercial purposes”, should be given its ordinary and natural meaning. He confirmed that Parliament’s intention was not a retrospective analysis of all the circumstances which gave rise to the property, but an assessment of the use to which the state had chosen to put the property.  

He also considered previous authority, in particular the House of Lords’ decision in Alcom Ltd v Republic of Columbia2 as well as case law from the USA and Hong Kong. In Alcom, the property was money in a current account held for the purpose of meeting the expenditure of a diplomatic mission of a foreign state. The House of Lords held that the property should be looked at as a whole and, even though some of the money might be used for commercial purposes, it was characterised as sovereign. The House of Lords in that case said the judgment creditor would have to show that the “bank account was earmarked by the foreign state solely for being drawn upon to settle liabilities incurred in commercial transactions” in order to be brought within the exception.  

In the present case, there was no relevant current or future commercial activity on the part of Iraq and SerVaas could not show that that the debt was earmarked to satisfy commercial liabilities.  

Comment

The judgment is a word of caution to those contracting with a state not to rely on the commercial purposes exception for enforcement and to ensure that immunity from execution is expressly waived in the contract, as is permitted in section 13(3) SIA. It also highlights the need to consider the execution assets carefully to make sure that they have a commercial purpose.