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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English Court rejects Ukraine’s attempt to set aside enforcement order on grounds of state immunity

The English Court (the “Court“) has dismissed an application by Ukraine to set aside a court order permitting Russian investor, PAO Tatneft, to enforce an arbitral award against Ukraine.  Ukraine argued that it was immune from the Court’s jurisdiction by virtue of the State Immunity Act 1978. The Court found that Ukraine had not waived its right to rely on state immunity arguments, despite not having raising them in the arbitration. However, it found that Ukraine had agreed to submit the disputes in question to arbitration under the Russia-Ukraine Bilateral Investment Treaty (the “BIT“) and was therefore not immune from proceedings in connection with the arbitration by virtue of s9(1) of the State Immunity Act 1978 (“SIA“).

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Sovereign immunity in the DIFC Court

Last week, the Dubai International Financial Centre Court issued its decision in Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq. The Court upheld its earlier decision which recognised two LCIA arbitration awards totalling US$2 billion issued against the Kurdistan Regional Government of Iraq (the “KRG”) and dismissed KRG’s arguments (1) that the enforcement proceedings should be set aside on the ground that the Court did not have jurisdiction to make such orders against it, and (2) that the DIFC Court should not decide issues of immunity and its waiver. Continue reading

Second Circuit Upends Enforcement of ICSID Awards in New York, Eliminates Circuit Split

In a ruling handed down on July 11, 2017, the United States Court of Appeals for the Second Circuit resolved a circuit split that had sown legal uncertainty on the correct procedure for the enforcement in the United States of awards rendered under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).

In Mobil Cerro Negro Ltd et al v. Bolivarian Republic of Venezuela (2d Cir. 2017), a unanimous three-judge panel held that an ExxonMobil Corporation subsidiary could only enforce its USD 188 million ICSID award against Venezuela through the procedures set forth in the Foreign Sovereign Immunities Act (FSIA), and not—as the court below had held—through summary ex parte proceedings.  The decision will likely have an impact on the reputation of the Southern District of New York's (SDNY) as a convenient enforcement forum for ICSID award creditors.

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AIPN EA CHAPTER EVENT: NEGOTIATING STATE IMMUNITY ISSUES IN INTERNATIONAL ENERGY CONTRACTS – LAW & PRACTICE

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 court declines execution against state-owned property on grounds of immunity

In L R Avionics Technologies Limited v. The Federal Republic of Nigeria, Attorney General of the Federation of Nigeria [2016] EWHC 1761 (Comm), the English High Court has set aside a charging order enforcing an arbitral award and related foreign judgment made against the Federal Republic of Nigeria ("Nigeria"). The charging order had been issued over a property owned by Nigeria but leased to a private company to process Nigerian visa and passport applications. In reaching its decision, the Court followed recent case law on the circumstances in which it can be said that property is “in use or intended for use for commercial purposes” pursuant to section 13(4) of the State Immunity Act 1978 (“SIA“).

1. ​Background

The claimant, LR Avionics Technologies Ltd. (the "Claimant"), had entered into a contract with Nigeria for the supply of military equipment. The contract was governed by Nigerian law and provided for arbitration in Nigeria under domestic law. Following a dispute, an award was issued for damages and costs to the Claimant (without interest) (the "Award"). Following enforcement proceedings in Nigeria, the Federal High Court of Nigeria entered judgment in terms of the Award and also ordered the defendants to pay interest (the "Nigerian Judgment").

Nigeria did not comply with the Award or the Nigerian Judgment. As a consequence, the Claimant commenced proceedings in the UK to register the Award under s.101 of the Arbitration Act 1996, and the Nigerian Judgment under s.9 of the Administration of Justice Act 1920 (the "Administration of Justice Act").

The Claimant applied to the Court for an interim, and then a final, charging order against freehold office premises (the "Property") owned by Nigeria but leased to a company called Online Integrated Solutions Ltd ("OIS") for the purpose of providing visa and passport services in exchange for an annual rent of £150,000. Nigeria was served (albeit with some irregularities), but did not participate in the proceedings. Once the final charging order was obtained, the Claimant sought an order for sale of the property. At this stage Nigeria issued an application to discharge or set aside the final charging order, arguing that the Property was exempt from execution on the basis of state immunity.

2. The Decision

The Court identified three main "issues of substance" in connection with the question of whether the Property was immune from execution under the SIA. First, could the Award be enforced; second, could the Nigerian Judgment be enforced; and third, in the event that enforcement of the Award or Nigerian Judgment was permitted, was the Property being used for "commercial purposes" such that state immunity would not apply under s.13(4) of the SIA and a charging order could be made against it. The court also considered whether the Property formed part of the Nigerian diplomatic mission.

2.1 The scope of the "arbitration exception" under s.9 of the SIA

Under s.9 of the SIA, where a State has agreed in writing to submit disputes to arbitration, "the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration".  The Court disposed of the first issue quickly by following established case law, to the effect that proceedings "which relate to the arbitration" include those for the recognition and enforcement of an award (Svenska Petroleum Exploration AB v. Government of the Republic of Lithuania [2006] EWCA Civ 1529 and NML Capital Ltd. v. Republic of Argentina [2011] UKSC 11). Accordingly, the Claimant was entitled to register the Award for recognition and enforcement.

2.2 Enforcement of the Nigerian Judgment

It remained material to determine this question because the Nigerian Judgment included interest, whereas the Award did not. English courts have considerable discretion under the Administration of Justice Act in relation to the enforcement of foreign judgments, and must consider whether enforcement of a foreign judgement would be "just and convenient". The Court accepted the Claimant's submission that the Nigerian Judgment was simply the conversion of an arbitral award into a judgment under a foreign statutory provision similar to s.66 of the Arbitration Act 1996. Accordingly, the Court held that these proceedings were all part of the process of enforcement of an award, and that its discretion should therefore be exercised in favour of enforcement of the judgment, for the same reasons as set out in Svenska and NML Capital.

2.3 Use of the Property for "commercial purposes"

However, the Court decided in favour of Nigeria on the third issue. Its decision turned on whether the Property was immune from execution, or whether the Property was "for the time being in use or intended for use for commercial purposes", such that the exception from immunity contained in s.13(4) of the SIA applied.

During the proceedings and pursuant to s.13(5) of the SIA, the Nigerian High Commissioner issued a certificate stating that the Property was "in use for Consular activities" and not for commercial purposes, which had the effect under the SIA of shifting the burden to the Claimant to prove the contrary.

The Claimant presented seven arguments in an attempt to demonstrate that the Property was being used for "commercial purposes". These included use of the Property by OIS, a private company, against payment of rent, OIS' partnerships with other national diplomatic missions, and the Property's availability (at one point in time) as a property which was available to rent on the open market. The Claimant submitted that OIS was therefore an agent which was operating on a commercial basis, and that this would satisfy the "commercial purposes" requirement under s.13(4) of the SIA.

The Court held that while OIS' operations would constitute a "typical commercial activity" from OIS' point of view, the Property was "being used for a consular activity" when viewed from the Nigerian High Commission's perspective. Noting the decision of the UK Supreme Court in SerVaas Incorporated, the Court observed that "the primary consideration must be the nature or character of the relevant activity". Although the Property may be connected with a commercial transaction (the contract for the supply of services by OIS to Nigeria), but the purpose for which it was in use was the provision of visa and passport services. This provision of consular services would constitute performance of a public function "regardless of whether that function is carried out by the defendant state itself or…an agent". Accordingly, the Court ruled that the Claimant had not discharged the burden upon it of proving that the Property was in use for commercial purposes, and set aside the charging order.

3. Comment

This case provides a useful illustration of the broad scope of the arbitration exception under the English law of sovereign immunity. It upholds the consistent line of case law that immunity will not apply to defeat enforcement proceedings in relation to an arbitral award, and also clarifies that the Court will likely exercise its discretion in favour of enforcing foreign judgments that have been entered in the terms of an arbitral award.

However, the case also highlights that recognition and enforcement of an arbitral award can be a pyrrhic victory if that Award cannot also be executed against that State's property. Notwithstanding the numerous links in this case between the Property and the private sector, the Court was clear that the Property ultimately was in use for public, consular, purposes, and should enjoy immunity.  

Here, the court continued the line of case law begun in Servaas Incorporated by interpreting the "commercial purposes" exception narrowly, thus demonstrating the difficulties associated with executing arbitral awards and court judgments against state-owned property. The Claimant's inability to proceed with execution in this case therefore highlights the importance of including a well-drafted waiver of state immunity in contracts which involve state parties to ensure that a clear written waiver for execution against State property is included, removing the need to rely upon the "commercial purposes" exception.

For further information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+33 1 5357 6552
Vanessa Naish
Vanessa Naish
Profession Support Consultant
+44 20 7466 2112

The development of State and Diplomatic Immunity under English law: views and insight

Herbert Smith Freehills Partners Dominic Roughton and Andrew Cannon have given an interview to Lexis Nexis on the development of the English law of state immunity and diplomatic immunity following the English court's decision in Attiya v Jaber Al Thani [2016] EWHC 212 (QB). The article can be found on our Public International Law Notes blog.

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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
Partner
+33 1 53 57 65 52

Video post: State immunity and waiver of immunity issues in English law

Andrew Cannon, Partner in our International Arbitration and Public International Law practices has posted a short video on our Public International Law Notes blog on “State immunity and waiver of immunity issues in English law”.  Andrew discusses the restrictive doctrine of immunity enshrined in the English State Immunity Act 1978 and describes the steps a party should take in dealing with a state to ensure an effective of waiver in respect of jurisdiction and enforcement.  To view the video, please click here.

Subscribers to our Arbitration Notes blog may also wish to subscribe to our Public International Law Notes blog for regular updates, analysis and comment on state immunity, investment treaty cases, investment protection, free trade agreements and other public international law issues. To subscribe to the Public International Law Blog, please click here, and enter your email in the “subscribe” box.

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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

Speakers:

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.