Parties doing business with foreign States should think carefully about the doctrine of state immunity, and how it might limit any rights they hold to enforce a judicial or arbitral decision obtained against a foreign State in the event of a dispute. Who to contract with, where the agreement might be enforced, what assets the agreement might be enforced against, and how to draft the dispute clause of the contract are all complex issues which involve questions of national and international law. In this article we consider those questions in light of the latest developments in the United Kingdom (“UK”), China, Hong Kong, and Australia.
Where to enforce your agreement with a State party?
When negotiating a contract with a State party, you should identify what jurisdictions the State party holds assets in. When contracting with State parties that hold assets exclusively in China and Hong Kong, you should avoid giving the courts of China and Hong Kong exclusive jurisdiction to determine any disputes, as principles of absolute immunity are likely to apply. By contrast, both the UK and Australian courts offer extensive exceptions to the state immunity rules, with the UK offering a broader interpretation of exceptions relating to arbitrations, and Australia offering a broader interpretation of exceptions relating to commercial transactions.
Which State party should you contract with?
If the identity of the specific entity that you will be contracting with is negotiable, you may wish to consider asking the State party to contract through a subsidiary, especially a commercial subsidiary. In the UK and Australia, this will place the onus on the contracting party to establish that it is a “separate entity” of a State and that it was exercising sovereignty, or acting as an agency or instrumentality of the State, in contracting. Even where you are ultimately forced to enforce a guarantee provided by the State party itself, the presence of a commercial subsidiary may increase the likelihood that a court will consider the transaction to a commercial transaction. Where your aims can be achieved by contracting with a regional authority rather than a national government, that may also be desirable.
What state-owned assets could you enforce against?
As a general rule, when you are contracting with State parties, you should identify not just where these State parties hold assets, but what kind of assets that they hold. The best assets to enforce against are immoveable property, which both the UK and Australian legislations specifically identify as assets exempt from the state immunity rules. By contrast, the worst assets to enforce against are liquid funds, which can be easily characterised by State parties as funds held or invested for a sovereign purpose (especially in Australia).
One example of assets that are likely to be available in a number of jurisdictions are moveable assets that are not money, such as aircraft. For example, in August 2015, Miminco LLC obtained an ex parte interim injunction in the Irish High Court preventing an aircraft from leaving Dublin Airport. The aircraft was purchased by the government of the Democratic Republic of Congo to establish a new national airline. That injunction was discharged in September 2015 on the basis that the debt on which the injunction was sought was a debt of the government of Congo and not of Congo Airways. The decision provides an example of the kinds of enforcement actions that may be brought against foreign State debtors.
How to draft your agreement with a State party?
It is important when negotiating jurisdiction and governing law clauses in a contract with a State party that you think carefully about where you are likely to need to enforce that contract, and against which State entities. For example, both the UK and Australian legislations contain specific rules on contractual clauses aiming at waiving immunity in relation to jurisdiction, to enforcement, and to execution. Further, if you are negotiating with a central bank, you may wish to seek that specific state assets are designated in the contract for the purposes of execution, to assist in enforcing the contract in China or Hong Kong. Arbitration clauses will give you the greatest breadth of enforcement options.
State immunity in the UK
The classic formulation of the common law rule on foreign state immunity was developed primarily in the context of admiralty law and was stated by Lord Atkin in The Cristina:
The courts of a country will not implead a foreign sovereign, that is, they will not by their process make him against his will a party to legal proceedings, whether the proceedings involve process against his person or seek to recover from him specific property or damages
From the late 1970s the scope of the rule was then changed, significantly, by judicial decisions, and ultimately by legislation such as the Foreign Sovereign Immunities Act 1976 (US), the State Immunity Act 1978 (UK), and the Foreign States Immunities Act 1985 (Aus). To some extent, those acts codified the recognised common law rules regarding foreign state immunity. However, in many respects those acts clarified and extended the scope of the exceptions to foreign state immunity. States that have adopted this approach practise a doctrine commonly referred to as "restricted state immunity" in contrast to "absolute state immunity".
In UK law of sovereign immunity, there is an important distinction to make at the outset between immunity from jurisdiction and immunity from enforcement:
- sovereign immunity from jurisdiction – this applies to the situation where a State is party to a substantive claim brought before the English Court. The question for the Court to answer will be: “Is the State party immune to the jurisdiction of the Court?” and
- sovereign immunity from enforcement – this applies to the situation where a State is party to enforcement proceedings instituted in the UK. Because the judgment creditor must start an action in the English Court for the value of the decision he is trying to enforce, the questions posed to the Court are twofold:
- “Is the sovereign party immune from jurisdiction of the English Court in relation to the enforcement proceedings instituted before it?” (this is a question of State immunity from enforcement jurisdiction); and
- “Is the sovereign asset on which enforcement is sought immune from execution in England?” (this is a question of State immunity from execution).
Under the State Immunity Act 1978 (UK), a State is immune from the jurisdiction of the courts of the UK, and the property of a State is not subject to enforcement of judgment or award, except where certain statutory exceptions apply.
Importance of the meaning of ‘separate entities’
State immunity does not apply to an entity which is distinct from the executive organs of government of the State and capable of suing or being sued (a ‘separate entity’), except in proceedings that relate to anything done by a separate entity in the exercise of sovereign authority where a State would have been immune.
In the recent case of Taurus Petroleum Ltd v State Oil Company of the Ministry of Oil, Republic of Iraq, a State Oil Company (“SOMO”) entered into certain contracts to sell crude oil and LPG to Taurus. A dispute arose and was referred to arbitration, in which Taurus was successful. Taurus applied to enforce the arbitral award by way of a third party debt order against letters of credit issued in London. SOMO argued that it was entitled to state immunity.
The English Court of Appeal rejected this sovereign immunity defence. It considered SOMO was a ‘separate entity’, on the basis that (i) it was legally distinct, (ii) was governed by a board of directors, and (iii) the State had no control over its day-to-day operations. While the exploitation of oil itself may have been an exercise of sovereign authority, the State chose to act through an intermediary in doing so, and lost the benefit of state immunity.
In Pearl Petroleum Company Ltd v The Kurdistan Regional Government of Iraq, the Kurdistan regional government of Iraq granted rights to Pearl to exploit two gas fields in Kurdistan. The Heads of Agreement entered into contained a provision referring any dispute to arbitration in England. Owing to a dispute, Kurdistan ceased making payments under the agreement, and Pearl applied to the arbitral tribunal for a provisional order that the payments should continue until the dispute was resolved. When that order was granted and payments did not continue, Pearl sought to enforce the provisional order in the UK.
Before the Court, the defendant accepted that it was a separate entity from the Iraqi State, but argued it was entitled to immunity on the basis that it was exercising sovereign authority. The Court accepted that was an exercise of sovereign authority, but held that it was an exercise of the sovereign authority of Kurdistan, nor the Iraqi State. As Kurdistan was not a foreign State entitled to the protection of state immunity, the exercise of the sovereign authority could not attract immunity under the State Immunities Act 1978 (UK).
Exceptions to state immunity from jurisdiction
The primary statutory exceptions to foreign state immunity from jurisdiction in the UK are:
- waiver/consent/submission to jurisdiction;
- proceedings relating to commercial transactions, or proceedings against property in use or intended to be used for commercial purposes;
- proceedings relating to an arbitration to which the foreign State has agreed in writing;and
- proceedings that are with respect to immovable property within the UK.
There are also exceptions in relation to contracts of employment, personal injury, intellectual property, membership of bodies corporate, and taxes.
The waiver/submission exception, will only apply to situations of unequivocal waiver. The English courts consider that a governing law clause does not amount to a submission to jurisdiction clause, and a submission to jurisdiction clause does not amount to a submission to execution. Parties contracting with State parties need to ensure that any waiver of sovereign immunity clause includes both a waiver as to jurisdiction and as to execution.
Exceptions to state immunity from enforcement
The arbitration exception and the commercial transaction exception are applied differently when it comes to enforcement proceedings. Enforcement proceedings relating to an arbitral award are treated differently from enforcement proceedings relating to a foreign judgment.
In Svenska Petroleum Exploration AB v Lithuania, Svenska entered into a joint venture agreement with a state-owned enterprise of Lithuania containing a clause under which the parties agreed that any dispute would be submitted to the courts of Lithuania or independent arbitration in Denmark. Svenska sought to enforce an arbitration award in its favour in the UK. Lithuania argued that the arbitration exception in the State Immunity Act did not extend to proceedings to enforce an arbitral award, but rather applied only to proceedings relating to the conduct of the arbitration. The Court of Appeal rejected that view and held that immunity was waived under the arbitration exception even in the context of proceedings for the enforcement of the arbitral award.
In Gold Reserve Inc v the Bolivarian Republic of Venezuela, an American company, Gold Reserve, acquired certain mining rights in Venezuela. Following a 1998 treaty with Canada which granted Canadian investors in Venezuela certain arbitration rights against the Venezuelan government in the event of a dispute, Gold Reserve was acquired by a Canadian company, GRI. GRI sought to enforce an arbitral award in its favour in the UK, and Venezuela objected on the basis of state immunity. The Court rejected Venezuela's defence of immunity on the basis that it had waived its immunity by agreeing to arbitration in the relevant treaty, and that there was a valid agreement to arbitrate as the claimant was a qualifying investor.
Commercial transaction exception
The ground that a State is not immune in proceedings relating to a commercial transaction entered into by the State is regarded as a key ground in resisting a claim to immunity from adjudication by a State generally. However, this ground has recently been found not to apply in the context of enforcement proceedings.
In NML Capital Limited v Republic of Argentina, a Cayman Island company, NML, purchased bonds issued by the Republic of Argentina, and obtained summary judgment for recovery of those bonds in the United States Federal Court in New York. NML sought to enforce that judgment in the UK, and Argentina claimed state immunity. The Supreme Court held that Argentina was immune on the basis that proceedings for the enforcement of that foreign judgment related only to that foreign judgment and not to the underlying commercial transaction, and thus refused to apply the commercial transaction exception.
Thus, where parties are in dispute regarding a commercial transaction that is not determined by arbitration, and not determined by the UK Courts, state immunity may counter any attempt to enforce in the UK.
The law of state immunity in China and Hong Kong
The Chinese government applies an absolute foreign state immunity rule, whereby both China and other foreign states are immune from being sued, and state assets are immune from court order, in China (without prior consent). In Democratic Republic of Congo v FG Hemisphere Associates LLC, the Office of the Commissioner of the Ministry of Foreign Affairs set out the position of the government of China as follows:
A state and its property shall, in foreign courts, enjoy absolute immunity, including absolute immunity from jurisdiction and from execution... The courts in China have no jurisdiction over, nor in practice have they ever entertained, any case in which a foreign state or government is sued as a defendant or any claim involving the property of any foreign state or government, irrespective of the nature or purpose of the relevant act of the foreign state or government and also irrespective of the nature, purpose or use of the relevant property of the foreign state or government.
The Chinese government has not stated its position on whether foreign separate entities are entitled to state immunity. In Intraline Resources SDN BHD v The Owners of the Ship or Vessel Hua Tian Long, counsel for the Chinese State before the Hong Kong courts expressly distinguished between state-owned enterprises (which enjoy independent powers of management and freedom from interference, with ownership of their assets and the capacity independently to assume civil liabilities) on the one hand, and state-controlled organisations on the other, suggesting that the latter was entitled to Crown immunity (a distinct but related immunity: see below) but that the former, implicitly, was not. It is arguable that in that case, the Chinese State recognised that state immunity would not be available to state-owned enterprises. However, the issue has not been determined.
Under article 1 of the Law of the People's Republic of China on Judicial Immunity from Compulsory Measures Concerning the Property of Foreign Central Banks, foreign central banks are granted immunity from execution over property except in relation to property that the foreign central bank has 'designated to be used for property preservation and execution' or the foreign central banks or the foreign government abandon their immunity in written form.
However, the above Measures also states that where any foreign country does not grant the immunity to the properties of the central bank of China, China will not grant immunity to such country as well according to the principle of reciprocity.
Although the State Immunity Act 1978 (UK) previously applied in Hong Kong (under the State Immunity (Overseas Territories) Order 1979), that act ceased to have effect at the reversion of sovereignty in 1997. In Democratic Republic of Congo v FG Hemisphere Associates LLC, the Hong Kong Court of Final Appeal held that the absolute foreign state immunity rule practised in China was applicable in Hong Kong. The Court, pursuant to article 158(3) of the Basic Law, referred that question for consideration by the Standing Committee of the National People's Congress, which confirmed the decision of the Court.
It is not clear whether separate entities are entitled to the benefit of absolute state immunity in Hong Kong. In Intraline Resources SDN BHD v The Owners of the Ship or Vessel Hua Tian Long, the judge held that ‘the concept of ‘control’ represents the modern benchmark for the attribution of Crown immunity’, and that a marine salvage organisation controlled by the Chinese State was entitled to immunity. However, that decision was expressly in the context of 'Crown' immunity, that is, the immunity of the sovereign State of China within Hong Kong. Although it may apply by analogy, it is not determinative of the test that will be applied in relation to foreign States. Following Democratic Republic of Congo v FG Hemisphere Associates LLC, that question falls to be determined by reference to the law applicable in China, including the law relating to foreign central banks.
The law of state immunity in Australia
The general position under the Foreign States Immunities Act 1985 (Aus) is that a foreign State is immune from the jurisdiction of the courts of Australia unless a statutory exception applies, and the property of a foreign State is not amenable to court order unless a statutory exception applies. The immunity applies to a separate entity that is an agency or instrumentality of a foreign State (but is not a department or organ of the executive government of a foreign State) in modified fashion.
Whether a party is acting as an agency or instrumentality of a State is important
In PT Garuda Indonesia Ltd v ACCC, the Full Federal Court of Australia considered that whether an entity was an agency or instrumentality of a foreign State depended primarily on whether the entity was ‘carrying out the foreign State's functions or purposes’ or ‘acting for, or being used by, the foreign State as a means to achieve some purpose or end of that State’. The Court considered that Garuda, which was 95.5% owned by Indonesia to provide air services to Indonesia, was a separate entity and was entitled to the immunity. The decision was affirmed on appeal to the High Court of Australia, although this issue was not appealed.
The exceptions in Australia to state immunity
The primary statutory exceptions to foreign state immunity are:
- waiver/consent/submission to jurisdiction;
- proceedings that are with respect to commercial transactions, or proceedings against property 'in use' or 'set aside' for commercial purposes;
- proceedings for the exercise of the supervisory jurisdiction of an Australian court in respect of an arbitration to which the foreign state has agreed; and
- proceedings that are with respect to immovable property within Australia.
There are also exceptions in relation to contracts of employment, personal injury, intellectual property, membership of bodies corporate, bills of exchange and taxes.
Note that, as in the UK, a governing law clause does not amount to a submission to jurisdiction, and a submission to jurisdiction clause does not amount to a submission to execution. Parties contracting with State parties need to ensure that any submission clause includes a submission to execution.
The Australian approach to state immunity from enforcement
In Firebird Global Master Fund II Ltd v Republic of Nauru, a Nauruan statutory corporation issued bonds, and a holder of the bonds obtained judgment in the Tokyo District Court against the Republic of Nauru as guarantor for the bonds. As the Nauru does not have a central bank, it holds the large proportion of its monies in Australia in accounts with the Westpac Banking Corporation. The High Court of Australia held that although enforcement proceedings could be brought against Nauru (as the underlying transaction was a commercial transaction), the judgment could not be executed against the money held in the Westpac accounts as they were not in use exclusively for commercial purposes.
It is instructive to note two aspects to this decision:
- First, the High Court rejected an argument that it should follow the decision of the UK Supreme Court in NML Capital Limited v Republic of Argentina. It held that as the underlying proceeding in Japan related to a commercial transaction, the enforcement of the judgment of the Japanese court in Australia was related to a commercial transaction.
- Secondly, the Court (and in particular the reasons for decision of Nettle and Gordon JJ) engaged in a detailed analysis of the purpose for which certain specific Westpac accounts were in use or had been set aside. It held that accounts for:
- running a national airline;
- providing compensation to landholders who suffered damage as a result of phosphate mining;
- subsidising fuel for Nauruan residents;
- subsidising utilities for Nauruan residents;
- providing business loans to Nauruan businesses;
- running the Nauruan fisheries authority; and
- holding a term deposit for future government services,
were all property that were not in use for commercial purposes.
This analysis provides a good guide for determining the likely approach to be taken by Australian courts in considering the purpose for which foreign state assets are in use. In particular, in relation to the term deposit, the High Court accepted the stated purpose of the deposit to secure funds for future government services, reasoning that is likely to be applicable to the assets of a sovereign wealth fund in Australia. In respect of a sovereign wealth fund that is a separate entity, the onus would be on the separate entity to first establish that it is acting as an agency or instrumentality of the State.
In many instances, it may be difficult to enforce awards or judgments against intransigent States, and recent headlines enforcement stories, such as Yukos v Russian Federation, provide examples of the lengths that State parties will put you to in order to avoid execution. However, careful decision-making and drafting at the time of contracting could limit the capacity of State parties to escape their obligations, and can help limit the time and expense of seeking compensation.