The State Law on Sovereign Immunity: ‘Old Wine in New Bottles’ – Part 1

Keywords: sovereign immunity, enforcement proceedings, central bank, execution, attachment, UN Convention on Jurisdictional Immunities of States and Their Property, 2004

Introductory Note: The author in this article primarily deals with state immunity laws of four major jurisdictions in two parts. Part I would constitute state immunity laws in the jurisdiction of USA (through the lens of ‘Foreign Sovereign Immunity Law 1978 or FSIA’) and UK (through the lens of ‘State Immunity Act 1976 or SIA’) and, Part-II would constitute the remaining two jurisdictions namely, Russia (‘The Sedalmayer Saga’) and China (‘The FG Hemisphere’ case).

Introduction

One of the first questions posed by clients regarding arbitration for alleged violations of international obligations by sovereign states is whether and how such award-creditors in Investor State Dispute Settlement (“ISDS”) would be able to successfully carry out execution proceedings. These execution proceedings would likely be against sovereign assets of the State. It is in this light that issues of sovereign immunity in Investment Treaty Arbitration (“ITA”) pose a unique set of challenges for award-creditors, which by and large remain muddled in age-old doctrinal study of state immunity laws. These laws vary in different jurisdictions and grant certain ‘exceptions’ to assets considered to be ipso facto performing sovereign functions. Therefore, these assets are de facto immune due to such State sovereign immunity laws. As we have come to know, foreign sovereign immunity prevents a nation from impleading a foreign State in domestic courts.[1] This notion of foreign sovereign immunity or for the purpose of this part of this article, ‘State sovereign immunity’, stemmed from a doctrine of State official immunity[2] and is most often cited originating in the United States Supreme Court decision of The Schooner Exchange v McFaddon.[3] (“The Schooner Exchange”). In the early stages of study on State sovereign immunity laws, the case, The Schooner Exchange, became the chief authority, for advocating and developing the notion of State’s ‘absolute immunity’.[4] The concept of ‘absolute immunity’ prevents a nation from being impleaded or tried in another sovereign State’s domestic courts without its prior consent. This aspect of sovereign immunity can be structurally differentiated between ‘absolutist’ approach (i.e., actua jure imperii) and ‘restrictive’ approach (i.e., acta jure gestionis), wherein sovereign immunity is only granted to the latter.

Four of the most powerful trading and investment generating nations, USA, UK, Russia and China, accord sovereign immunity pursuant to their municipal laws on sovereign immunity. The author will try to highlight the rationale behind few notable municipal judgments in these jurisdictions on sovereign immunity and exceptions to sovereign immunity (‘restrictive’ v ‘absolute’ immunity).

However, before dealing with sovereign immunity laws in these jurisdictions, the author deems fit to bring to light that sovereign immunity laws are not only State centric, but constitutes a broader realm under international law. Therefore, the existing legal sources of sovereign immunity arising in ‘public international law’ are to be generally found in “Chapter II: Competence of the Court, Article 38 (1)” of the Statute of the International Court of Justice (“ICJ”). A multilateral framework or a convention is lacking on sovereign immunity, and therefore, over time, the law on sovereign immunity has developed primarily only through domestic judgements and through States laws/legislations to the same effect.[5]

To quote noted scholar, Sir James Crawford, ‘[i]mmunity exists as a rule of international law, but its application depends substantially on the law and procedural rules of the forum’.[6] Therefore, it is in this light and role of sovereign immunity in both the spheres of law, national and international, that the author will analyse the law of State immunity in respect of ‘four jurisdictions’.

USA (US Foreign Sovereign Immunity Act, 1976)

The United States has become a prime jurisdiction for the enforcement of foreign arbitral awards.[7] In 1976, the Congress passed the Foreign Sovereign Immunities Act (“FSIA”), which governs all claims brought in any US courts, whether State or federal against States.[8] As the United Nations Convention on Jurisdictional Immunities of States and Their Property, 2004 (“UNSCI”), FSIA also treats sovereign immunity from execution as a separate matter from jurisdiction.[9] In 1988, Congress amended the FSIA to address the issue of implicit waiver of jurisdictional immunity by virtue of consent to arbitration. It did so by introducing Section 1605 (a) to permit an action to confirm, and eventually enforce, an award in the US. Relevant parts of the section provide:

“A foreign State shall not be immune from the jurisdiction of courts of the United States […] in any case […] in which the action is brought […] to confirm an award made pursuant to […] an agreement to arbitrate, if […] the agreement or award is or may be governed by a ‘treaty’ or ‘other international agreement’ in force for the United States calling for the recognition and enforcement of arbitral awards.”

The ‘treaty’ and ‘other international agreement’ mentioned above includes,the Convention on Recognition of Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) and the International Centre for Settlement of Investment Disputes (“ICSID”), to both of which the US is a signatory.[10] The US courts have consistently held that consent to arbitration under the New York Convention constitutes waiver of immunity as far as jurisdiction of a party is concerned, in the US.[11] The same holds true for the ICSID Convention.[12] Therefore, if a valid consent to arbitration exists between the parties, the FSIA will not shield the foreign sovereign from being tried or impleaded in US domestic courts for enforcement of foreign arbitral award.[13] This ‘arbitration exception’ to immunity is also to be found in United States implementing statute, ‘22 USC Section 1605a’ (“ICSID Enabling Statute”), which was implemented 10 years before FSIA for the very purpose of implementing the ICSID Convention.[14] This instrument states that ‘the pecuniary obligations imposed by the ICSID Convention and the final award rendered is to be given the same faith and credit as if it was a final judgment of a domestic/national court.[15]

The final obstacle for award-creditors comes in the form of execution and attaching certain assets which are considered to be immune in the USA. Such award-creditors need to request the attachment (i.e. execution) of foreign assets in satisfaction of the claim.[16] FSIA follows the doctrine of restrictive immunity as enshrined under the UNSCI. Under ‘Section 1610 (a) (1)’ of FSIA, it provides that ‘only property used for commercial purposes in the US’ is subject to execution to satisfy an award.[17]

One of the most noted arbitration and international law scholars, Ingrid Wuerth, talked about separating the issues of immunity from execution in terms of attaching and executing central bank assets, in ‘three’ varied forms; (a) (Almost) Absolute immunity; (b) Middle approaches; and (c) The commercial activity approach. If we talk about the USA, when it comes to immunity from execution of central bank assets, we need to focus on the middle approaches. Countries in the middle of the spectrum such as the US accord either special protection to central bank assets which falls short of absolute protection, or they have a high level of protection for all State-owned property (including that of central banks), or they have a combination of both.[18] The US protects the property of a foreign central bank “held for its own account” from measures of constraint, although it allows post-judgment execution against central bank assets based on an explicit waiver of immunity[19] and or certain ‘terrorism-related activity.[20]

In one of the notable municipal judgments rendered by the US Courts, in regards to execution and attachment of central bank properties in satisfaction of a judicial claim is the case of NML Capital Ltd. v. Banco Cent. De La Republica Arg.[21] It was held that the scope of immunity for central bank property from measures of execution in the US largely depends upon the meaning of the phrase “held for its own account”.[22] The leading case interpreting this phrase is NML, where the Court of Appeals for the Second Circuit reasoned that, “held for its own account” must include property used for commercial activities, because State property not used for a commercial activity is already immune from execution, whether or not owned by a central bank.[23] However, the court did not explain the scope and future of central banking functions, for a party in a proceeding or even after, can restructure its corporate finances and siphon off the money in the name of central bank, which unfortunately as per the obiter dictum applied by the court, will be presumed (as per the ‘presumption test’) to perform central banking functions. Thus, the court after applying the presumption and central banking function test held that the funds held by the ‘Federal Reserve Bank of New York’ in the name of the ‘Central Bank of Argentina’ (“BCRA”) were presumptively immune from attachment and later on execution.[24] The funds were intended in part to ‘pay Argentina banks that sought to reduce the amount of their US dollar reserves’ and in part to ‘to purchase US dollars in order to control the value of peso’ and some funds were deposited pursuant to a regulatory exchange rule that BCRA imposed on Argentina exporters. Thus, the Court considered these activities to be ‘paradigmatic central banking functions.’

UK UK State Immunity Act, 1978

Under English law, the regime of immunity is covered by ‘UK State Immunity Act’ (“SIA”).[25] In this respect, Article 9 of SIA states that; ‘where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as regards proceedings in the courts of the United Kingdom which relate to the arbitration.’ Therefore, the question which arises here for consideration is; whether such presumption of waiver of immunity from jurisdiction in terms of agreement to arbitrate also constitutes jurisdictional waiver from immunity from execution or enforcement proceedings or not? To analyse this aspect, let us look from the lens of some notable municipal law judgments concerning the UK.

In one of the cases involving applicability of SIA, Svenska Petroleum Exploration AB v. Lithuania (No.2)[26] is a prime example wherein the Court of Appeal (English Courts) held that SIA undoubtedly includes both i.e., waiver of immunity from agreement to arbitrate as well as waiver of immunity in terms of execution or enforcement of arbitration award proceedings. This nonetheless, granted an official stamp/a go-ahead to the applicability of SIA even to execution and enforcement proceedings concerning foreign arbitral awards, which to the authors understanding, has the potential to make a viable international arbitral award a ‘toothless tiger.’

More recently in, Gold Reserve Inc v. The Bolivarian Republic of Venezuela[27], the High Court analysed Venezuela’s claim to immunity in the context of enforcement of an investment arbitral award.[28] Interpreting Section 9 of the SIA, the High Court upheld the doctrine of waiver from jurisdiction i.e. a party has deemed to waive its argument on jurisdictional challenges if the agreement to arbitrate exists under the agreement.[29] The judgment is a bit of an overstretch by the court because the party claiming immunity was claiming it from execution or enforcement of investment arbitral award whereas the court in this case inferred the waiver doctrine in terms of jurisdiction akin to a waiver doctrine in terms of enforcement proceedings. The High Court ultimately rejected Venezuela’s immunity plea in the award for enforcement proceedings.[30]Additionally, in Pearl v. Kurdistan[31], a similar view on the doctrine of waiver from jurisdiction arguments was upheld .[32]

Thus, it is apparent in the regime of SIA that, even in the absence of express and comprehensive waiver clause in the contract, when approaching the UK domestic courts in jurisdiction and enforcement of award proceedings (including attachment and execution), the courts are pretty clear that consent to arbitrate constitutes waiver of not only of jurisdiction but general waiver of any sovereign immunity claims.[33]

Apart from this, SIA, Section 3(1) provides for the definition of ‘commercial transaction’ and ‘commercial transaction exception’ to immunity from jurisdiction under English law, which is considered to be the ‘restrictive immunity’ doctrine. Thus, akey takeaway from SIA and the jurisprudence the judges in UK domestic courts have applied is that, ‘wide range of disputes concerning diverse mining and energy agreements related to the exploitation of a State’s natural resources’ are to be considered as an exercise of sovereign authority[34] for public and non-commercial purposes.

Section 13 (2) (b) SIA also provides that ‘the property of a State shall not be subject to any process for the enforcement of a judgment of an arbitration award or in an action in rem for its arrest detention or sale.’[35] Hence, in the UK, no relief may be granted against the foreign State by way of recovery of land or other property and the property of a State is not subject to any enforcement of a judgement or award.[36] However, as stated above, there are some exceptions to this SIA regime. Section 13 (3) – (4) enables enforcement against a States asset in two situations, only, namely- (1) with the written consent of the State; or (2) where the relevant property is in use or intended for use for ‘commercial purposes.’

The SIA regime on enforcement of award through attachment and execution of certain bank assetwas analysed and finally ruled by the highest court of UK, the Supreme Court, in the case of SerVaas Incorporated v. Rafidain Bank and Others.[37] SerVaas obtained a judgment in Iraq which it sought to enforce in England. Rafidain Bank (which had a branch in London) held large sums on behalf of Iraq, which SerVaas claimed had been acquired through a chain of commercial transactions between the bank and its creditors and thus, was also available for enforcement.[38] The Supreme Court ultimately found that, the immunity of the central bank prevailed in this case on the basis that it was not the origin of the property but the intended nature of present and future use of the property, which mattered.[39] Although the funds were indeed held by the bank in London, the funds were held and used for States sovereign purpose as it was the UN backed development fund of Iraq, which is not commercial in nature and therefore, does not fall within the exceptions to commerciality under the SIA regime.[40]

To sum up the SIA regime, a central bank asset is given ‘absolute immunity’ under English law pursuant to Section 14 (4) of SIA, subject only to the exception of written consent of the central bank[41]which we discussed earlier. To cite once of the case wherein the court upheld Section 14 (4) SIA and considered central bank funds as an ‘exempted assets’ is the case of AIC Limited v. (1) The Federal Government of Nigeria, (2) The Attorney General of the Federation of Nigeria[42]. The court was met with an exercise to decide whether funds in a bank account in the name of a central bank under Section 14 (4) of the SIA could be enforced if those funds were used or intended for use for commercial purposes, falling within the exception to immunity under Section 13 (4) of SIA.[43] The court held that ‘even if the use of the funds would be commercial (‘intended use’), the property of a central bank should not be subject to enforcement.[44] In other words, the protection afforded to central banks jeopardizes the commercial-purpose exception.[45]

ENDNOTES

[1] E McCullough, ‘Summary of the Judgment of 13 February 2019’ 15.

[2] Ibid , This is otherwise known as head of State immunity. For the basis of sovereign immunity in the pre-existing head of State immunity, see Ian Sinclair, ‘The Law of Sovereign Immunity: Recent Developments’ (1980) 167 Recueil des Cours de l’Académie de Droit International 113, 121.
[3] ‘The Exchange v. McFaddon, 11 U.S. 116 (1812)’ (Justia Law) https://supreme.justia.com/cases/federal/us/11/116/ accessed 18 June 2021.
[4] Lee Walker, ‘Jurisdictional Immunities of the State (Germany v Italy; Greece Intervening) (Judgment) (International Court of Justice, General List No 143, 3 February 2012)’ 8.
[5] Asif H Qureshi, Manchester Journal 44, 406
[6] Qureshi (n 5); James Crawford, Brownlie’s Principles of Public International Law (9th edn. OUP 2019).
[7] Javier García Olmedo, ‘Sovereign Immunity as a Ground to Refuse Compliance with Investor-State Awards: Past Experience and Future Developments’ in K. Fach Gómez and M. López Rodríguez (eds), 60 Years of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards: Key Issues and Future Challenges (Kluwer Law International 2020) 11.
[8] Ibid , See Foreign Sovereign Immunities Act, 28 U.S.C. A. 1610 (1976).
[9] Olmedo (n 7).
[10] Hazel Fox QC and Philippa Webb, The Law of State Immunity (3rd edn. OUP 2013); Olmedo (n 7).
[11] Olmedo (n 7).
[12] Ibid , See Blue Ridge Investments, LLC v Argentina [2012] SDNY 10 Civ. 153 [2012].
[13] Olmedo (n 7).
[14] Ibid , See 22 U.S. Code (Foreign Relations and Intercourse) s 1605a – Arbitration awards under the Convention.
[15] Olmedo (n 7).
[16] Ibid.
[17] Olmedo (n 7).
[18] Ingrid Wuerth, ‘Immunity from Execution of Central Bank Assets’ in Tom Ruys, Nicolas Angelet, & Luca Ferro (eds), The Cambridge Handbook of Immunities and International Law (1st edn CUP 2019) 266–284.
[19] Wuerth (n 21), See Title 28 (n 10) § 1611(b)(1) (2012) – Central bank property may be subject to attachment and to execution if the government or the bank “has explicitly waived its immunity from attachment in aid of execution, or from execution”. Courts have interpreted this language to mean that central banks cannot waive their immunity from pre-judgment attachment. See, e.g., Weston Compagnie de Finance Et D’Investissement, S.A. v La Republica del Ecuador [1993] SDNY 823 F. Supp. 1106, 1110-11 (hereinafter Weston Compagnie).
[20] Wuerth (n 21) ; Title 28 (n 10) §1605A.
[21] NML Capital, Ltd v. BCRA [2011] 2d Cir. 652 F.3d 172. Other notable judgements with US as a party to proceedings are-(1) Liberian Eastern Timber Corporation (LETCO) v. Republic of Liberia, ICSID Case No. ARB/83/2, Award of 30 March 1986 – “Section 1610 FSIA” i.e. protection of sovereign assets from attachment. (2) Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania [I], ICSID Case No. ARB/05/20. (3) Venezuela Holdings, B.V., et al (case formerly known as Mobil Corporation, Venezuela Holdings, B.V., al.) v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27. (4) Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l v. Kingdom of Spain, ICSID Case No. ARB/13/36 https://www.courtlistener.com/opinion/220234/nml-capital-ltd-v-bcra/ accessed 4 May 2020.
[22] Wuerth (n 21).
[23] NML Capital, Ltd v. BCRA [2011] 2d Cir. 652 F.3d 172, Weston Compagnie (n 22).
[24] Wuerth ( n 21).
[25] Félix J Montero & Paloma Castro, ‘Waivers of Sovereign Immunities in Enforcement Proceedings and the 1958 NY Convention’ in Katia Fach Gómez Ana Mercedes López Rodríguez (eds), 60 Years of the New York Convention: Key Issues and Future Challenges (Wolters Kluwer 2019) 12.
[26] Ibid , Svenska Petroleum Exploration AB v Lithuania, EWCA Civ 1529 QB 886 [2006].
[27] Ibid ,See Gold Reserve Inc. v The Bolivarian Republic of Venezuela [2016] EWHC 153 (Comm).
[28] Ibid.
[29] Montero and Castro (n 29) .
[30] Ibid.
[31] Ibid , see Pearl Petroleum Co Ltd. v. Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm).
[32] Montero and Castro (n 29).
[33] Ibid.
[34] Montero and Castro ( n 29).
[35] Ibid.
[36] Ibid.
[37] SerVaas Incorporated v. Rafidain Bank UKSC 2011/0247 [2012].
[38] Montero and Castro (n 29).
[39] Ibid.
[40] Ibid.
[41] Montero and Castro (n 29).
[42] Ibid.
[43] Ibid.
[44] Ibid.

The author, Aman Prasad, is an arbitration associate at ‘DSNR Legal Advocates & Solicitors’. An advocate with the Bar Council of Delhi (2017), he has been practicing as a commercial litigator for the past four years. His professional affiliations include a LLM from Uppsala University, Sweden.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.