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  EWHC 3361 (Comm)
In 2007, the Kurdistan Regional Government of Iraq (the “Respondent”) entered into an agreement with an international consortium (the "Claimants") granting exploitation rights over two gas fields in the Kurdistan Region of Iraq (the "Agreement"). Disputes arose between the parties in 2009, particularly concerning allegations of underpayment by the Respondent for product from the fields. The Claimants initiated LCIA arbitration in 2013, after which the Respondent ceased making any payments to the Claimants, although still required the Claimants to provide the product.
In 2014, the Tribunal made an interim measures order, under Article 25 of the LCIA Rules, for the Respondent to resume payments to the Claimants at the level it had been making before the arbitration had commenced. The Respondent failed to comply with this order. Three months later, the Tribunal granted the Claimants a peremptory order under section 41(5) of the Arbitration Act 1996 (the "Arbitration Act"), requiring the Respondent to pay US$100m to the Claimants within 30 days. The Respondent again failed to comply, and the Claimants applied to the Court to enforce the order. The Respondent counter-applied for a declaration that it was immune from the Court’s jurisdiction by virtue of the State Immunity Act 1978 (the “SIA”).
The issues before the Court
In his judgment of 20 November 2015, Mr Justice Burton considered three principal issues, as set out below.
Issue 1 – Was the peremptory order properly made within the jurisdiction of the arbitrators according to s.41 of the Arbitration Act and the LCIA Rules, and therefore did the Court have jurisdiction to make an order to enforce that order under s.42 of the Arbitration Act?
Section 42 of the Arbitration Act provides that a court may make an order requiring a party to comply with a peremptory order of an arbitral tribunal. However, the Respondent argued that it was only appropriate for a court to do so where the peremptory order was expressly made “for the proper and expeditious conduct of the arbitration”. The Respondent’s argument was based on the wording of section 41(1) of the Arbitration Act which provides that “parties are free to agree on the powers of the tribunal in case of a party’s failure to do something necessary for the proper and expeditious conduct of the arbitration”.
The Court dismissed the Respondent's argument. This wording did not override the provision of section 41(5) that a tribunal may make a peremptory order where a party fails (without showing sufficient cause) to comply with any order of the tribunal. There was no requirement or need for tribunals to state expressly that the orders they make are necessary for the proper and expeditious conduct of the arbitration. It was clear on the facts that the Tribunal had considered that this order was so necessary.
Issue 2 – Did the Respondent have immunity from the claim pursuant to the SIA?
The Court dismissed the Respondent's claim for immunity from its jurisdiction, for a number of reasons:
The Respondent, as a "separate entity" under the SIA, did not enjoy immunity as it was not exercising the sovereign authority of a state
Section 14 SIA provides immunity to entities that are separate from a state if the proceedings relate to something done by that entity in the exercise of sovereign authority. The Court upheld the view taken in Svenska Petroleum v Lithuania ( QB 886) that entering into a long-term contract for the exploitation of natural resources involves an exercise of sovereign authority. The Agreement was not simply a commercial contract for the sale of gas, but the assignment of rights granted to the Respondent under the Constitution of Iraq.
However, the Court held that the sovereign authority being exercised was not that of the state of Iraq, but of the Respondent itself. In fact there was a dispute between the Respondent and the Federal Government of Iraq over the Respondent’s rights in relation to the gas fields. Therefore the Respondent, exercising its own authority not that of a state, did not have the protection of immunity under section 14 SIA.
Having made this determination, Burton J went on to consider (obiter) what the position would have been if the Respondent did have the benefit of state immunity.
The Respondent had waived its immunity by submission to arbitration
Following the ruling in Svenska, an application enforce an arbitral order does "relate to the arbitration" for the purposes of the exemption to immunity contained in section 9 SIA. By consenting to arbitration in the Agreement, the Respondent had therefore in any event waived its immunity from the jurisdiction of the Courts.
Separately, Burton J also considered, while noting that there was no direct authority on the point, that a separate entity was entitled to the protection of section 13 (concerning immunity from enforcement against property, injunction and orders for specific performance) in the same way as a state by virtue of section 14(3) SIA, notwithstanding that it had consented to arbitration.
The Respondent had also waived its immunity expressly under the Agreement
Further, the Court considered that any immunity to which the Respondent might have been entitled under section 13 SIA was waived by the waiver clause included in the Agreement. The waiver clause read: "The KRG waives on its own behalf and that of the KRG any claim to immunity for itself or its assets". Significantly, although the waiver clause did not specifically reference injunctions or other interim relief, Burton J considered it sufficiently broad to amount to such a waiver.
In any event, Burton J considered that section 13(2)(a) (providing immunity from injunctive relief) would not have applied in the present case, since an application for a s.42 order under the Arbitration Act was not an order for an injunction.
Issue 3 – Should the Court in any event exercise its discretion to enforce the order?
It was common ground that the Court has its own discretion, and does not "act as a rubber stamp on orders made by the Tribunal". The Court noted various factors that should be taken into account, including that the Court should not revisit arguments raised before the Arbitrators provided that the Arbitrators have addressed the correct questions (which Burton J was satisfied that they had); whether there had been any material changes in circumstances; immunity, act of state and comity; and the utility of any order.
Taking account of these considerations, the Court was satisfied that it should exercise its discretion in favour of enforcing the peremptory order. It rejected the Respondent's arguments that the prevailing situation in Iraq – including the need to fund the fight against ISIS and cope with the refugee situation – meant that it could not afford to pay the Claimants, noting among other things that the Respondent had nevertheless been making substantial payments to other international oil producers.
This case serves to underline the willingness of the English Courts to assist tribunals in ensuring compliance with their orders, even in the more unusual situation of the grant of a peremptory order. The Court emphasised that this may not always be the case, and the Court retains a discretion, but in this case the Tribunal had clearly fulfilled its duties under the Arbitration Act. There was no need for the Court "to be astute to construe detailed reasons such as were here given by the Arbitrators in a context of assuming that experienced arbitrators are in some way failing to comply with their duty".
Although much of the discussion of immunity is obiter, and concerns the particular political situation of the KRG. Nevertheless, the judgment provides useful guidance on a number of complex issues of interpretation of the SIA, particularly in the context of "separate entities". Of particular note is the Court's determination that the grant of exploitation rights over natural resources is an exercise of sovereign authority for the purposes of the SIA, and its view that a waiver of immunity in respect of interim relief does not need to be specifically stated but can be implied from a more general waiver clause. Noting also the potential need for enforcement in other jurisdictions, however, it is always advisable to include as clear and comprehensive waiver language as possible.
For further information, please contact Andrew Cannon, Partner or your usual Herbert Smith Freehills contact.