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"Rex Non Potest Peccare". Arbitration and State Immunity

01 February 2017 | Europe
Legal Briefings

The immunity of states and their assets from the reach of national courts is an area of law with considerable practical implications for both private and state-owned entities entering into international contracts. State immunity may affect whether a court or arbitral tribunal will take jurisdiction over a state. Then, assuming it is possible to establish that a court or arbitral has adjudicative jurisdiction over a state, immunity may hinder enforcement of any judgment or award. In this article, we consider a number of key considerations for parties negotiating contracts with states and state-owned entities across the globe, as well as providing a comparative look at the legal position with regard to immunity in a number of key jurisdictions. 

What is state immunity?

  • Historically, most legal systems recognised a doctrine known as "absolute immunity", whereby no sovereign state could be sued before the courts of another state without its clear and express consent.
  • However, as states have engaged in increasing commercial activity, many jurisdictions have embraced a "restrictive" doctrine of state immunity. In a number of jurisdictions, the restrictive doctrine has been enshrined in statute (for example, in the UK by the State Immunity Act 1978 ("SIA") and in the US in the Foreign Sovereign Immunities Act 1976 ("FSIA")). It is also recognised in international conventions such as the 2004 UN Convention on the Jurisdictional Immunities of States and Their Property, and the 1972 European Convention on State Immunity. Central to the restrictive doctrine is a legal distinction between public or sovereign activities, where states generally continue to enjoy immunity, and commercial activities, where they do not.
  • State immunity will apply at two principal stages: first, at the jurisdiction stage (immunity from suit) and, second, at the execution stage (where a party seeks to enforce a judgment or an award against state property).

Which law is relevant?

  • The applicable law on state immunity depends on the forum in which a defence of immunity is raised and in this sense can be seen as a matter of procedure, rather than a substantive issue under the governing law of the contract. Accordingly, parties must consider the state immunity laws of any country in which: (i) the courts may have jurisdiction to determine a dispute; and (ii) enforcement and execution is likely to take place.
  • It may also be necessary to consider the law of the state itself with regard to whether the state entity in question is properly to be considered as an emanation of the state and therefore to have the benefit of immunity, and/or whether it is performing sovereign functions (which may also be a relevant consideration). 

Key points to consider

  1. Negotiate express waivers of immunity in respect of jurisdiction and execution. Any such waiver should expressly apply in relation to both pre-judgment attachment and other interim relief and post-judgment execution of awards.
  2. The state should not only waive its immunity but also expressly submit to the jurisdiction of the relevant court or courts.
  3. Ensure that the waiver is valid in all relevant jurisdictions, in particular where an award is likely to be enforced. Take local law advice; certain jurisdictions retain the doctrine of absolute immunity, notably including Hong Kong and China, Russia and many jurisdictions in Africa.
  4. Consider whether a waiver should specify the categories of asset over which the state waives immunity from execution. In some jurisdictions it is necessary to specify categories of assets over which immunity is waived (see, for example, France, although the law in this area may develop in the course of 2017 following the adoption of a new law). In other cases, such express provision may avoid later disputes about the scope of the waiver and whether it includes non-commercial assets. Bear in mind that certain classes of asset are unlikely to fall within any relevant "commercial use" exception, including the property of a state's central bank, diplomatic or consular missions, military and cultural property. 
  5. Consent to resolve disputes by arbitration may be sufficient to constitute a waiver of immunity in relation to the supervisory jurisdiction of the courts of the seat of arbitration (for example, if an application to the court was necessary in relation to the constitution of the tribunal or a challenge to an arbitrator), although this implied waiver may not extend to enforcement and execution. An arbitration clause can therefore provide a useful mechanism to overcome at least jurisdictional immunity where a clear contractual waiver of immunity cannot be obtained. 
  6. It can also be useful in the relevant contract to specify the agreement of all parties that the contract involves only private and commercial acts, thereby invoking the "restrictive" doctrine of immunity. 
  7. Immunity remains a consideration in relation to the enforcement and execution of ICSID awards. Article 55 of the ICSID Convention makes it clear that a state does not, by becoming a party to the Convention, waive such immunity from execution of an award as the state might enjoy under national laws. 

We set out in a separate table, key principles of state immunity in the strategic jurisdictions of the UK, Hong Kong, the USA, France and Germany. The table can be accessed by clicking this link.


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