Contracting with governments: pitfalls, arbitration, sovereign immunity and enforcement

Entering into a contract with an entity owned or controlled by the state poses unique challenges not faced when dealing with a private commercial counterparty. Parties should be aware of certain distinctive features of negotiating with a state entity from the start of any commercial relationship. It is particularly important for parties to consider these implications when conducting business in the Middle East given that:

i. state entities play a major role in the procurement of major projects, particularly in GCC countries; and

ii. the reconstruction of infrastructure and the development of natural resources in countries such as Iraq require significant foreign investment in the form of contracts with state-owned entities.

Determining whether or not a commercial party is dealing with a state entity is not always a straightforward process in the Middle East. As such, parties should take extra care and consider the following factors at the outset:

a) the capacity of the entity to enter into an arbitration agreement;

b) the ability of the state in question to raise a defence of sovereign immunity in the future; and

c) the investment treaty protections that a company may be able to utilise.

In this article, we set out the key factors that parties should consider when negotiating with a state entity in order to maximise the protections available should a dispute arise at a later point.

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Live audio webinar: Protecting your investments from political risk in a volatile world – 21 June 2017 – 1.00pm UK time

In this webinar, we will offer a disputes perspective on how to protect your investments from political risk in the current economic and political climate. Disputes lawyers are often brought on board when things have already gone wrong, tasked with limiting the fallout, managing a crisis or resolving a dispute formally or informally. However, we know what can go wrong and can therefore offer insight into what might have been done at the outset to reduce the chance of a dispute arising in the first place. We know what we need to build a solid claim and what would or could have made our client’s position in any dispute stronger.

In this webinar our panel will explore what we mean by “political risk” before looking at ways that risk can be mitigated. The topics our speakers will explore include:

  • Looking beyond the transaction: protecting your future position whilst negotiating
  • Contractual protections
  • Investment structuring to benefit from investment treaties
  • Political risk insurance: coverage, wordings and maximising policy response
  • Steps to protect yourself when an investment turns sour

Finally, we will talk through some practical points which can really aid a client’s position if and when a dispute does arise.


Andrew Cannon, Partner, International Arbitration, Paris

Sarah McNally,  Partner, Insurance Disputes, London

Iain Maxwell, Of Counsel, International Arbitration, London

To register for this event please click here.

Andrew Cannon
Andrew Cannon
+33 1 53 57 65 52
Sarah McNally
Sarah McNally
+44 20 7466 2872
Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646




Herbert Smith Freehills’ Response to EU Consultation: the Future of Investor-State Dispute Settlement

As discussed in our blog post here, on 21 December 2016 the EU Commission launched a public consultation on the multilateral reform of the investment dispute settlement system. The consultation closed on 15 March 2017 with a full report of the responses anticipated later this year. Herbert Smith Freehills has submitted a position paper to the Commission in response to the consultation.

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EU launches consultation on multilateral reform of the investor-state dispute resolution system

The EU Commission (the Commission) has launched a public consultation on the multilateral reform of the investment dispute settlement system.  The survey is found here and responses are due by 15 March 2017.  The consultation is the next step in furtherance of the Commission's objective to develop a multilateral system for the resolution of international investment disputes and, amongst other things, seeks to explore views on its proposal to develop a permanent multilateral investment court system.

The development of the Commission's position over the last couple of years and the Commission's introduction to the consultation both suggest a determination to pursue wholesale change to the system of resolution of investor-state disputes, rather than a more nuanced approach in evaluating the perceived flaws in the current system under which investor-state disputes are largely resolved by ad hoc arbitration (often under the auspices of ICSID, part of the World Bank).  However, notwithstanding its clearly stated objective, the Commission's survey also countenances in the alternative the establishment of a Multilateral Appeal Tribunal which would consider appeals from the decisions of ad hoc investment arbitration tribunals established under the current system. 

The responses to the consultation will be significant in terms of the future of the Commission's objective to establish a Multilateral Investment Court. In particular, it will be crucial that a constructive and positive response is received from the third party states who are asked to partner with the Commission in developing the Multilateral Investment Court system.  However, it remains to be seen whether the survey will elucidate clear responses which will assist the Commission in considering further its proposals for the future of investor-state dispute settlement: the majority of the survey questions treat as interchangeable the two different approaches (the establishment of a Multilateral Investment Court system and the establishment of a Multilateral Appeal Tribunal) and the survey does not seek responses on the development of a Multilateral Appeal Tribunal alongside reform of the current system of ad hoc arbitration.  It is not clear whether this option continues to be considered by the Commission.

The issues and controversies surrounding the resolution of investor-state disputes are complex and any changes to the system pursued by the Commission would ideally be based on clearly expressed views from a range of stakeholders.  It is to be hoped therefore that respondents to the survey take the opportunity offered by the Commission to clarify their responses by way of uploading a position paper. 

With unprecedented growth in foreign direct investment, issues concerning substantive investment protection and the way in which investor-state disputes are resolved both now and in the future are significant for both states and investors.  If you would like to discuss these issues or the Commission's consultation, please contact: Larry Shore, Partner, Dominic Roughton, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact. 

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French Conseil d’État rules on scope of powers to set aside arbitral awards / Le Conseil d’État s’est prononcé sur l’étendue de son contrôle s’agissant de l’annulation d’une sentence arbitrale internationale

In a decision of 9 November 2016, the French Conseil d’État, France's highest administrative jurisdiction, ruled on the extent of its scope of review as regards annulment of an international arbitral award. The decision relates to an ICC arbitral award made in Paris arising from a dispute between Fosmax, subsidiary of French power utility Engie (formerly GDF), and construction consortium STS.  The Conseil d’État's decision represents the latest in a series of cases following the "INSERM" decision (referred to in our blog post here), giving administrative authorities jurisdiction over appeals of international arbitration awards issued in France which relate to administrative contracts. This approach derogates from Article 1519(1) of the French Code of Civil Procedure ("CPC") under which an action to set aside an award is brought before the Court of Appeal of the place where the award was made and seems to establish a dual regime for review of arbitral awards, depending on whether the award involves a public entity.

Please read on for further details and a French-language version of this blog post.

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Live webcast of hearing on jurisdiction and the merits: United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v. Republic of Estonia (ICSID Case No. ARB/14/24)

A hearing on jurisdiction and the merits in ICSID Case No. ARB/14/24, United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v Republic of Estonia, will be transmitted live via internet feed from Monday, November 7, 2016 to Tuesday, November 15, 2016 (from 9:00 a.m. to approximately 5:00 p.m. CET (Central European Time) on November 10, 2016 and from 10:00 a.m. to approximately 6:00 p.m. CET on all other days).

This webcast is being made available pursuant to the parties’ agreement. To access the webcast, please click here.

Herbert Smith Freehills is co-counsel for the Claimants.

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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 energy contracts.

In this panel discussion, the speakers will address the issue of immunity from a number of perspectives, considering key principles of the UK and international law on state immunity, in the light of recent developments. The panel will draw on their experience to highlight how immunity may apply to states, state-owned entities and other international actors involved in the energy sector. The speakers will also consider the practicalities of negotiating waivers of immunity, as well as their key features and implications.

Please find further details below.

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English High Court orders payment of $100m arbitral peremptory order, denying KRG claim to immunity

In its recent judgment of 20 November 2015, the High Court of England and Wales (the "Court") enforced a US$100m peremptory order made in arbitral proceedings against the Kurdistan Regional Government of Iraq. The judgment considers a number of interesting questions regarding state immunity as well as the relationship between courts and arbitral proceedings: (1) Pearl Petroleum Company Limited (2) Dana Gas PJSC (3) Crescent Petroleum Company Limited v The Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm)

This case is considered by Partner, Andrew Cannon, on our blog dedicated to Public International Law developments, here. 

Andrew Cannon
Andrew Cannon
+33 1 53 57 65 52

Thai Government Lifts Total Ban on Arbitration Clauses in State Contracts

A recent Thai Cabinet resolution relaxes the restriction on arbitration clauses in some public contracts.  The resolution is seen as a positive move for arbitration and investment in Thailand, but more remains to be done.

The New Cabinet Resolution

On 14 July 2015, the Thai Cabinet passed a resolution (the "2015 Resolution") amending a 2009 resolution (the "2009 Resolution") which prohibited the inclusion of arbitration clauses in all contracts entered into by private contracts with the public sector unless approved by the Cabinet on a case-by-case basis. 

Under the 2015 Resolution, Cabinet approval for arbitration clauses will now only be required for three types of contract, as explained further below.

Although a Cabinet resolution is a statement of government policy and does not have the binding status of a law, decree or regulation, in practice Cabinet resolutions will be followed by all of those affected.  In this case, all Thai ministries, government departments and other public bodies were notified of the 2015 Resolution on 17 July 2015.

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Herbert Smith Freehills hosts Panel Discussion and Seminar on “The State of State Immunity” in conjunction with the British Branch of the International Law Association

Herbert Smith Freehills, in conjunction with the British Branch of the International Law Association, is hosting a Seminar entitled “The State of State Immunity”. The Seminar will address Recent Developments, the “Commercial Purposes” Exception and provide practical guidance on negotiating immunity issues.

Date:Tuesday 29 September 2015
Time:6pm to 7pm, followed by drinks (Registration from 5:45pm)
Venue:Exchange House, Primrose Street, London, EC2A 2EG
Please click here to view map


Adam Johnson, Partner, Herbert Smith Freehills (Chair)

Chanaka Wickremasinghe, Legal Counsellor, UK Foreign & Commonwealth Office

Michael Stock, Senior Group Legal Counsel, Dispute Resolution, Standard Chartered Bank

Andrew Cannon, Partner, Herbert Smith Freehills

The immunity of states and their assets from the reach of national courts is an area of law with considerable practical implications in the context of contracts between states and commercial parties.

In this panel discussion, the speakers will consider recent developments on state immunity in the English courts, as well as the exceptions to the immunity of states granted by the State Immunity Act 1978. They will consider how effective waivers of immunity can be negotiated, and how immunity may apply to state-owned entities and other bodies. The speakers will draw on their considerable experience from the public and private sectors to offer practical guidance and insights into this significant area of law.

The event will be held under the Chatham House Rule.

Places are limited.  To register your interest in this event, or for further information, please contact Paul McKeating.