State immunity and international arbitration

Foreign state immunity is an important consideration for commercial parties dealing with foreign states or state owned entities. Failure to properly address the issue can have serious consequences. State immunity is in itself a complex issue, but this is compounded by the fact that the approach to immunity is not common across all jurisdictions. In an increasingly global market, commercial parties must be alive to jurisdictional nuances. We compare the approaches to state immunity in England, Hong Kong, Singapore, Australia, the US and Canada.

The doctrine of state immunity can sometimes resemble the playground game of tag: the private investor chases after the state this way and that until, immediately before being caught, the state touches the wall, declaring that it is immune when “on base”.

State immunity provides foreign states with protection against legal proceedings brought before the courts of other jurisdictions. It is to be distinguished from “crown immunity” which protects states from legal proceedings brought before their own courts. There are important reasons why national laws protect foreign sovereign interests, even if at the expense of private investors. However, this means that diligent commercial parties must approach all dealings with foreign states or state owned entities carefully; considering who to contract with and how to incorporate comprehensive waivers of state immunity – both in respect of immunity from suit and immunity from execution – in all relevant jurisdictions. Parties need to be aware of the limitations of any waiver, and, critically, the approach to state immunity in all jurisdictions where any award or judgment would be enforced against state assets.

Most jurisdictions adopt either an “absolute” or a “restrictive” approach to state immunity. Under the absolute approach a foreign state enjoys total immunity from being sued or having its assets seized by a foreign court, even in commercial matters. Under the restrictive approach, a foreign state is only immune in relation to activities involving an exercise of sovereign power. The state may therefore be sued and have its assets seized in a foreign court in commercial or private matters, and important distinctions must be drawn between commercial versus sovereign activities and assets.

In the context of arbitration, the agreement by the state entity to arbitrate is often – but not always – sufficient to waive immunity from suit and establish the tribunal’s jurisdiction over the state. Critically though, it generally does not follow that this amounts to an effective waiver of immunity from execution of the award against state assets.

The purpose of this article is to compare the approaches to state immunity taken by key common law arbitration jurisdictions and to highlight recent developments.

England takes a restrictive approach to state immunity. The English State Immunity Act 1978 (UKSIA) provides immunity from jurisdiction subject to exceptions, including where the state has agreed to arbitrate. The UKSIA also provides immunity from execution subject to two exceptions where: (1) there is written consent to execution (submission to jurisdiction only will not be sufficient); or (2) where state property is used for commercial purposes.

In LR Avionics Technologies Limited v The Federal Republic of Nigeria [2016] EWHC 1761 (Comm), the Commercial Court considered the question of what constitutes “use for commercial purposes”. Premises owned by Nigeria had been leased on commercial terms to a private company for the purpose of outsourcing consular activities (issuance of visas and passports). The court held that the premises were not in use for commercial purposes so remained immune from execution. The issuance of visas and passports was a sovereign activity. That it was performed through a commercial agent under contract was “merely incidental”.

Prior to the handover of Hong Kong to the PRC in June 1997, Hong Kong followed the English approach of restrictive immunity. After 1997, Hong Kong was required by the Hong Kong Basic Law to adopt the PRC position on “foreign affairs” and the PRC’s position is one of absolute immunity.

Accordingly, the Hong Kong Court of Final Appeal (CFA) decided in the case of FG Hemisphere v The Democratic Republic of Congo FACV 5-7/2010 that after 1997 the absolute doctrine of immunity applies in Hong Kong. The CFA’s decision was referred to the Standing Committee of the National People’s Congress for confirmation (the SCNPC has the ultimate responsibility for matters of foreign affairs in Hong Kong) and confirmation was duly provided.

This represented a fundamental change to Hong Kong’s approach to state immunity. Foreign states are now absolutely immune from suits brought against them in the Hong Kong courts.

Singapore takes a restrictive approach to state immunity. The Singapore State Immunity Act (Chapter 313, Revised Edition 2014) (SSIA) is modelled closely on the UKSIA, with some minor differences. These include removing references to international conventions on state immunity to which Singapore is not a party (such as the European Convention on State Immunity and the International Convention for the Unification of Certain Rules Concerning the Immunity of State-owned Ships).

Under the SSIA, foreign states are generally immune from jurisdiction, save for where: the state has submitted to the jurisdiction of the Singaporean courts (s. 4(1)); a state has agreed to arbitrate (s. 11(1)); and proceedings relate to commercial transactions entered into by the state or a contractual obligation of the state (whether commercial transaction or not) that falls to be performed wholly or partly in Singapore (s. 5(1)). In defining a “commercial transaction”, Singapore has followed the UK approach by setting out a list of categories of such transactions (s. 5(3)).

As for immunity from execution against a state’s property, the general immunity is set out in section 15(2) of the SSIA. However, there is a commercial exception to this immunity: a state’s immunity from execution against its property does not apply to property “which is for the time being in use or intended for use for commercial purposes” (s. 15(4)). “Commercial purposes” is defined as “purposes of such transactions or activities as are mentioned in section 5(3)”, and section 5(3) in turn and as explained above, relates to the “commercial transactions” exception to state immunity.

In WestLB AG v Philippine National Bank and others [2007] 1 SLR(R) 967, the Singapore High Court considered the commercial transaction exception (s. 5(1)(a) SSIA), albeit obiter. This case concerned funds accumulated by the late President of the Republic of Philippines (Philippines), Ferdinand E Marcos, which were, as a result of steps taken by the Philippines and the Swiss authorities, moved from bank accounts in Switzerland to the Philippines National Bank (PNB), and then by PNB to WestLB AG, Singapore (WestLB). In 2003, the Supreme Court of the Philippines ordered the funds to be forfeited to the Philippines and PNB instructed WestLB to release the funds. WestLB refused as it faced competing claims to the funds. WestLB commenced interpleader proceedings in Singapore to determine ownership, adding the Philippines as a defendant to those proceedings. The Philippines applied for a stay on the basis that it was, inter alia, entitled to state immunity.

The court held that the Philippines had submitted to the court’s jurisdiction (a finding upheld on appeal). Although it was unnecessary to determine whether the commercial transaction exception was made out, the court went on to consider this for completeness. The court took the view that the act of placing the funds into WestLB’s bank account must be looked at in its whole context and that, in context, it was “an integral part of the exercise of its sovereign powers to recover the funds and … not commercial transactions undertaken by [the Philippines]”. Accordingly, the commercial transaction exception would not have applied (and this point was not pursued on appeal).

Australia’s Foreign States Immunity Act 1985 (Cth) (AUFSIA) takes a restrictive approach to state immunity. Foreign states are granted immunity from jurisdiction unless certain statutory exceptions apply (ss. 10-21 AUFSIA). A foreign state’s agreement to arbitrate will waive immunity from a tribunal’s jurisdiction. In addition, section 17 of the AUFSIA provides that where a foreign state has agreed to arbitrate, subject to any inconsistent provision in the agreement, the state is not immune in court proceedings related to the arbitration (e.g. court proceedings determining the validity or operation of the arbitration agreement or procedure, or to set aside an award), unless it is an inter-governmental agreement.

Foreign states also enjoy immunity from execution unless and to the extent that the state has waived immunity in relation to its property or the property is being used for commercial purposes. Submission to the jurisdiction (by agreement or conduct) will not be sufficient on its own to waive immunity from execution.

In Firebird Global Master Fund II Ltd v Republic of Nauru [2015] HCA 43, the High Court considered both the commercial transaction exception to jurisdiction (s. 11(1)) and the property in use for commercial purposes exception to immunity from execution (s. 32). The court held, in the context of proceedings for the registration of a foreign judgment, that Nauru was not immune from the jurisdiction of Australian courts. There was an exception to immunity from suit because the proceedings concerned a commercial transaction; namely, the guarantee upon which the foreign judgment was based. However, the court upheld Nauru’s claim to immunity from execution against its property represented by bank accounts held in Australia because the purposes for which those accounts were in use, or for which the monies in them were set aside, were not commercial purposes.

Like England, the US takes a restrictive approach to state immunity. The Foreign Sovereign Immunities Act (USFSIA) grants foreign states immunity from suit in US courts (federal or state). There are a number of exceptions to immunity under the USFSIA, including where a state waives immunity, agrees to submit a dispute to arbitration or engages in commercial activity.

In recent years, the immunity afforded by the USFIA has been narrowed, however the commercial exception to state immunity has potentially broadened.

Justice Against Sponsors of Terrorism Act

In September 2016, the US Congress passed the Justice Against Sponsors of Terrorism Act (JASTA). JASTA made a number of changes to state immunity under the USFSIA.

JASTA narrowed states’ rights to jurisdictional immunity by eliminating the requirement that a foreign state first be designated by the US government as a “state sponsor of terrorism” before it could be sued in US courts.

JASTA further narrowed immunity by eliminating the “entire tort” rule. Prior to JASTA, certain US courts had construed USFSIA to allow claims against foreign states for an act of international terrorism only when both the alleged injury and terrorist act occurred within the United States. JASTA eliminated this rule, allowing claims against foreign states for injuries to persons or property in the United States “regardless where the tortious act or acts of the foreign state occurred.”. JASTA counterbalanced its narrowing of immunity by providing the US government with authority to intervene in any lawsuit and effectively stay the case indefinitely upon a certification that good-faith state-state negotiations concerning the resolution of the claims against the foreign state were ongoing.

Commercial activity carried on in the US

In 2015, the US Supreme Court clarified the standard for applying USFSIA’s exception to jurisdictional immunity for actions “based upon a commercial activity carried on in the United States” by a foreign state (OBB Personenverkehr AG v Sachs, 136 S. Ct. 390 (2015)). In this case, the claimant was injured in Austria when stepping off a Eurorail train. She sued Eurorail in the US on the basis of having purchased her ticket in the US electronically. The lower appellate court found this sufficient to trigger the “in the United States” condition of USFSIA’s “commercial activity” exception. The Supreme Court reversed and, under a “gravamen of the complaint” standard, found that the “foundation” of the suit was the injury in Austria.

Like the UK and the US, Canada also takes a restrictive approach to state immunity. But its approach is unique in certain important aspects. Under the Canadian State Immunity Act R.S.C 1985 (CSIA), a state may waive immunity. A waiver of jurisdictional immunity requires proof that the foreign state “explicitly submits to the jurisdiction of the court by written agreement” (s. 4). A waiver of execution immunity requires proof that the state has, either explicitly or by implication, waived its immunity from attachment, execution, etc. (s. 12). A foreign state is also not immune from jurisdiction in any proceedings relating to commercial activity (s. 5).

However, unlike the UKSIA and the USFSIA, the CSIA does not have an exception from immunity for arbitration agreements. Obiter reasoning in TMR Energy Ltd. v State Property Fund of Ukraine, 2003 FC 1517 suggests that an agreement to arbitrate may be considered an express waiver of jurisdiction immunity but this has not yet been definitively decided. Instead, both the commercial activity exception and the waiver of execution immunity by implication have been relied upon by Canadian courts to enforce arbitral awards against states.

These issues were considered in Collavino Inc. v Tihama Development Authority, 2007 ABQB 212. The Alberta Court of Queen’s Bench reasoned that the respondent, a state organ of Yemen, must be deemed to have waived execution immunity by agreeing to international commercial arbitration; otherwise, the effect of an award could be thwarted. The court also accepted that the “plain, obvious and ordinary meaning” of “commercial activity” as used in the CSIA captured the underlying transaction at issue and thus the commercial exception to immunity applied.

Recent cases have followed a similar path. Canadian Planning and Design Consultants Inc. v Libya, 2015 ONCA 661 is an ongoing case in the context of enforcement of an ICC award against Libya. In 2014, the Ontario Superior Court of Justice issued an order recognizing the ICC award, stating that Libya had by implication waived its immunity from execution. However this case raised a further novel issue, namely whether by agreeing to ICC arbitration, Libya had waived either execution or diplomatic immunity (or both) in respect of certain bank accounts in Ontario (over which the claimant had obtained garnishment orders). Libya argued that the bank accounts specified were accounts of the Embassy of Libya and that they were used by that Embassy for diplomatic purposes. This issue is yet to be adjudicated.

As the brief discussions above highlight, issues of sovereign immunity are not only complex but they differ from jurisdiction to jurisdiction. Failure to adequately consider and address questions of sovereign immunity could have serious consequences, including losing the ability to enforce contractual rights, recover damages or enforce judgments or awards. Parties contracting with foreign states or state-owned entities must ensure that they have obtained comprehensive advice covering all relevant jurisdictions, including jurisdictions where proceedings might be brought as well as those where enforcement against state assets might be sought. Contractual terms must be carefully drafted if parties are to benefit from the best possible protection.