The case of Pearl Petroleum Company Limited v the Kurdistan Regional Government of Iraq (“Pearl Petroleum”), provides insights into the application of sovereign immunity principles in the UAE, which, unlike many jurisdictions, has not addressed sovereign immunity through legislation. The case broadly reinforces the importance to investors of including an express and broad waiver of sovereign immunity — both as to immunity from suit and immunity from execution — in agreements with states and state-owned entities.

Background

The dispute at issue in Pearl Petroleum arose out of an agreement between the Kurdistan Regional Government of Iraq (“KRG”) and the Claimants (Crescent Petroleum, Dana Gas and Pearl Petroleum) for the development, marketing and sale of petroleum and liquefied petroleum products from two fields in Kurdistan. The agreement was governed by English law, and disputes were subject to arbitration in London under the LCIA Rules. The agreement expressly provided that “the KRG waives on its own behalf and that of the [Kurdistan Region of Iraq] any claim to immunity for itself and its assets”.

When a dispute arose out of performance of the agreement, Claimants commenced an LCIA arbitration. After the KRG stopped paying for liquid petroleum products, the Claimants secured an interim order from the Tribunal directing the KRG to make payments. The KRG refused to comply. The Claimants then applied to the Tribunal for a peremptory order on the same terms. The Tribunal ordered the KRG to pay Claimants US$ 100 million to be set off against the KRG’s liability under the interim order. The Claimants applied to the English High Court for enforcement of the peremptory order. The KRG asserted state immunity under the State Immunity Act 1978. The High Court rejected the immunity defense and ordered enforcement.

On the merits, the Tribunal eventually concluded that the KRG breached the agreement and awarded over US$ 2 billion to the Claimants. The Claimants sought to enforce the final awards in England, the District of Columbia and the Dubai International Financial Centre (“DIFC”).

The DIFC Court Decision

The DIFC Court of First Instance issued an ex parte order permitting (i) enforcement of the LCIA awards against the KRG and (ii) alternative service of the enforcement orders. The KRG applied to set aside these orders claiming both sovereign immunity and that service had to be done in accordance with the Riyadh Convention.

In reviewing its ex parte order, the DIFC Court held that the KRG had expressly waived sovereign immunity against recognition and enforcement. It also determined that it was for the judiciary, as opposed to the executive branch, to decide waiver issues. While the DIFC Court held that the KRG was not protected by sovereign immunity, it vacated the order permitting alternative service on the ground that the Riyadh Convention did not authorize alternative service.

We focus here on the central sovereign immunity concepts raised in the decision.

Waiver as a Matter for Judicial Resolution

The KRG argued that the DIFC Court lacked jurisdiction to recognize the awards against it because, according to the KRG, only an executive body of the UAE, not the judiciary, could determine the existence and scope of sovereign immunity in the UAE. The Court rejected the argument, stressing that immunity is a question of procedural law and that the judiciary must decide upon the construction and extent of a waiver based on consensual obligations undertaken in a commercial contractual context. The Court acknowledged that whether or not an entity can be recognized as a state may be a matter for the UAE to decide as a matter of foreign policy. The Court avoided that issue, however, by focusing on whether the contractual waiver would be effective even if the KRG was entitled to assert immunity. “[W]here the issue is one of law...whether as to the exercise of sovereign powers by an entity...or as to the nature of the entity as a constituent arm of the state, the issues fall to be decided by the judiciary. There can be no doubt about this when it comes to construing a waiver ....” (Pearl Petroleum, p. 23 of 46, para. 23).

Immunity from Suit v Immunity from Execution

The DIFC Court addressed the issue of immunity from suit as distinct from immunity from execution. It held that any clause providing a waiver of state or sovereign immunity must be examined to ascertain the extent of the waiver given. The arbitration was seated in London, and the English High Court had ruled, under English law, that the operative waiver clause — “the KRG waives on its own behalf and that of the [Kurdistan Region of Iraq] any claim to immunity for itself and its assets” — was sufficient to waive any immunity from injunctive relief in the context of enforcing the Tribunal’s peremptory order in England. The High Court explained that the KRG’s waivers in the agreement were “concise”, “robust” and “general” (Pearl Petroleum, p. 25 of 46, para. 28).

The DIFC Court looked carefully at the High Court’s application of English law to the agreement. Regardless of whether the English High Court decision estopped the KRG from challenging the breadth of the waiver, the DIFC Court found the High Court’s analysis persuasive. The DIFC Court explained that “there is no way of escaping the width of the waiver provisions, which specifically refer to the assets of the KRG, and, as is accepted, of [the Kurdistan Region of Iraq] also, and can only be taken therefore to include a waiver from execution as well as from suit.” The decision thus demonstrates the importance of careful drafting when contracting for a sovereign immunity waiver.

A Waiver Need Not Be Made Before a Court to be Effective

The KRG argued that for a waiver of immunity to be effective, it had to be made before the court and refer specifically to the court and matter in question. The DIFC Court rejected this assertion as reflecting an anachronistic view of sovereign immunity. The Court noted that in England, Section 2 of the State Immunity Act reversed the position that a state could not submit to the jurisdiction of the courts by prior written agreement. Likewise, the UN Convention on Jurisdictional Immunities of States and their Property recognizes that immunities may be waived in a prior written agreement. The DIFC Court distinguished a Hong Kong decision — Democratic Republic of Congo and others v FG Hemisphere Associates LLC [2011] HK CFAR 395. Although the Hong Kong court did require a specific waiver in that case, it did so in the context of the PRC rule of absolute immunity, and the express provision in Hong Kong’s Basic Law requiring reference of immunity questions to the executive branch.

Conclusion

The DIFC Court’s decision in the Pearl Petroleum case reinforces the importance of including broad and express waivers of sovereign immunity in commercial agreements with states and state-owned entities. In jurisdictions such as England with statutes implementing the modern concept of restrictive immunity, such waivers are effective. The DIFC Court’s decision shows that such express waivers can also be effective in jurisdictions where immunity issues are not yet addressed by legislation.