The Supreme Court decision in SerVaas Incorporated v Rafidain Bank ( UKSC 40) concerned the scope of a government's immunity from execution of a judgment under Section 13(4) of the State Immunity Act 1978. It confirmed that when determining whether to apply the 'commercial purposes' exception to state immunity, the origin of the property against which execution is sought is irrelevant, even if it is commercial.
The issues in the appeal were not concerned with a government's immunity from suit, which is governed by Section 3 of the act, but rather with the scope of its immunity from execution of a judgment against it, which is governed by Sections 13(2)(b) and 13(4) of the act. Section 13(2)(b) states that:
"[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."
Section 13(4) states that "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".
SerVaas, a company incorporated in Indiana, brought proceedings in Paris against the Iraqi Ministry of Industry 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 the Iraqi government by Rafidain Bank under a scheme of arrangement. Rafidain was in liquidation in England and Wales and was due to pay significant sums to the Iraqi government as part of a restructuring of debts that 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 the Iraqi government.
The head of mission of the Iraqi embassy in London signed a certificate stating that the Iraqi government intended to direct the distribution due under the scheme of arrangement to the UN Development Fund for Iraq (DFI), and that the debts were not in use, or intended for use, by or on behalf of the Iraqi government for commercial purposes. The certificate, under Section 13(5) of the act, was sufficient evidence that the debts were not intended for commercial use, unless SerVaas could prove otherwise. The fact that the distribution was intended for the DFI made it common ground that the debts were intended to be used for sovereign – not commercial – purposes.
The lower courts had refused the third-party debt order, holding that:
- SerVaas had no real prospect of rebutting the presumption created by the certificate; and
- the origin of the debts was irrelevant when determining whether their current use was for commercial purposes.
The key questions before the court were whether:
- the debts were "property which is for the time being in use or intended for use for commercial purposes" under Section 13(4) of the act; and
- the origin of the debts was relevant to the question of whether the property was in use for commercial purposes.
SerVaas's position was that the nature of the transaction which gave rise to Rafidain's liability was entirely commercial, since Rafidain was a commercial bank and the debts had originally arose from commercial transactions between Rafidain and its commercial creditors.
The Supreme Court unanimously held that the commercial purposes exception to state immunity did not apply on the facts of this case and dismissed the appeal against the decision upholding immunity from execution.
The Supreme Court agreed with the reasoning of the Court of Appeal and held that the origin of the debts 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 that gave rise to the property, but an assessment of the use to which the government in question had chosen to put the property.
He also considered previous decisions, in particular, the House of Lords decision in Alcom Ltd v Republic of Columbia ( AC 580) and case law from the United States and Hong Kong. In Alcom the property was money in a current account held for the purpose of meeting the expenditures of a foreign government's diplomatic mission. The House of Lords held that the property should be looked at as a whole, and although some of the money might be used for commercial purposes, it was characterised as sovereign. The House of Lords in that case stated that 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 for the exception to apply.
In the present case, there was no relevant current or future commercial activity on the part of the Iraqi government, and SerVaas could not show that the debt had been earmarked to satisfy commercial liabilities.
The judgment serves as a warning for those contracting with a government 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) of the act. It also highlights the need to consider the execution assets carefully to make sure that they have a commercial purpose.
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