The State Law on Sovereign Immunity: ‘Old Wine in New Bottles’ – Part 2

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).

Russia (‘The Sedelmayer Saga’)

In Russian Federation (‘Russia’), and other former soviet socialist States, there is a clear trend away from the theory of absolute immunity towards restrictive immunity.[1] In many of the former socialist States as well as developing countries, the law of State immunity remains shrouded in mystery.[2] It is for this reason that analysing Russia’s law on sovereign immunity is of utmost importance. There is  also the fact that the former soviet socialist States follow or apply nearly identical or similar sovereign law provisions to Russia. There has been a clear trend of shifting from absolute immunity to restrictive immunity in Russia, which was evident from Russia’s arguments before the Swedish Supreme Court in the 1998 decision, which the author will discuss a little bit later. This aspect of Russia’s stand on sovereign immunity will be discussed by the author in terms of jurisdictional claims in The Russian Federation v. Franz Sedalmayer[3] case before the Arbitration Institute of Stockholm Chamber of Commerce (‘SCC’) and execution proceedings in Franz Sedalmayer v. The Russian Federation[4] before the Swedish Supreme Court.

The Russian Federation v. Sedelmayer (‘Decision on Jurisdiction’): Russia challenged the arbitral award rendered by SCC before the Stockholm District Court,[5] on the ground that the arbitral tribunal lacked jurisdiction.[6] The Stockholm District Court dealt very briefly with Mr. Sedelmayer’s objection to jurisdiction that the National/Local Court of Sweden lacked jurisdiction to hear the challenge pertaining to the jurisdictional issue preferred by the State of Russia. Mr. Sedelmayer argued that arbitral proceedings as well as an award under public international law could not be challenged under the Swedish Arbitration Act[7] due to principles enshrined under the international arbitration that local courts at the seat of arbitration or award, should adopt a ‘minimum standard of judicial review process.’ This issue was dealt by Stockholm District Court by ruling that ‘arbitral award rendered in Sweden (Stockholm) can be challenged before the Swedish domestic courts, irrespective of whether any of the parties have an significant association with the seat of the award or not,’[8] thereby giving an official immunity and temporal reference to the so-called nationality of an foreign arbitral award having direct nexus to the place and venue of arbitral award. One can even bring out a contextual reference to the dictums of the Swedish National Courts meaning that an foreign arbitral award rendered at a specific seat of arbitration gets merged with the applicable laws of arbitration set in motion at the venue and place of arbitration for the purposes of challenge proceedings.  Thus in accordance to such national level arbitration principles, the award was considered to be a Swedish arbitral award and not foreign arbitral award, as asserted by Mr. Sedelmayer.[9] The Court finally concluded that, ‘at least where one of the parties to arbitration was not a sovereign State and subject to municipal law, the fact that arbitration was based on a treaty concluded between two sovereign States did not cause it to reach a different conclusion’.[10]

On the other hand, Russia also raised jurisdictional objections against the arbitral tribunal . First, it alleged Mr. Sedelmayer’s investments as ‘indirect investment’ outside the purview of the BIT. Second, Mr. Sedelmayer was not covered under the definition of an investor. And third, the request for arbitration is directed to ‘Procurement Department of the Russian Federation’ and not directly to the Russian Federation. The District Court found the first two grounds to be covered by the ‘doctrine of assertion[11]’, a Swedish procedural law principle.[12] Regarding the argument of Russia that it was not properly served with the notice of arbitration, the Court held that the ‘Procurement Department of the Russian Federation’ was the state organ directly involved in the forced transfer of the premises, the Russian Federation was properly represented in the arbitration through the Procurement Department.[13]

Franz Sedalmayer v. The Russian Federation (‘Decision on Enforcement and Execution’)

In 1998 Mr. Sedalmayer won an ITA award against Russia and for many years, he tried to enforce and execute his award gaining pecuniary value, but he failed. Russia defended enforcement of the award on the grounds of sovereign immunity to certain assets. After many years, Mr. Sedalmayer found a real estate property in the city of Cologne, owned by Russia and used for commercial purposes for enforcement purposes. In seeking to enforce his award, Mr. Sedalmayer applied to the ‘Swedish Enforcement Agency’ but the agency refused to enforce his award due to sovereign immunity issues enjoyed by that particular Russian asset. Mr. Sedelmayer appeal finally went up to ‘Svea Court of Appeal’ which found that execution measures against the said property could be taken with respect to rent paid by tenants living in the building premises, which was considered to be ‘commercial’ in nature and that Russia had not argued on gaining absolute immunity.[14] After all this, Russia finally appealed to the Swedish Supreme Court against the orders of Svea Court of Appeal on possible execution of Russian State property. The test applied by Swedish Supreme Court was the test for actual use of the property by Russia. The Court concluded that the property was used for such other purposes, other than sovereign prerogative of Russian State. The activities conducted were commercial i.e., acta jure gestionis, in nature and not actua jure imperii (sovereign purpose), wherein immunity is only granted to the former.

The Sedalmayer decision is a perfect illustration that in spite of the Russian Federation officially still not adopting any legislative act in this field which confirms that the restrictive theory has been adopted[15], but slowly and gradually is moving towards the restrictive theory to sovereign immunity approach.[16]

China (‘The FG Hemisphere’ case)

To date, there is no Chinese substantive law or procedural law specifically dealing with sovereign immunity.[17] As Professor Hobér noted in his book,[18] that as per the Chinese scholars, China has traditionally advocated the doctrine of absolute immunity.[19] This can be summarised as follows:

1. Based on the sovereign equality of all States, the sovereign immunity of States and their property is a principle of international law;[20]

2. Unless a State voluntarily and expressly waives its immunity, all acts of a State per se or concluded on its behalf should be immune from foreign jurisdictions;[21]

3. A state-owned enterprise is an independent legal entity and should not enjoy immunities for its activities;[22]

4. Negotiations and international treaties should be utilized to deal with the differences among nations concerning the issues of State immunity;[23] and

5. China reserves its rights to take countermeasures if any foreign State infringes upon sovereign immunities enjoyed by China and its property;[24]

There is, however, a limited number of laws and regulations dealing with specific instances of China’s sovereign immunity, it was only in 2005 when the Chinese “Law on Judicial Immunity from Measures of Constraint for the Property of Foreign Central Banks”[25] (‘2005 Law of Judicial Immunity’) was adopted. This law is probably the first Chinese law on State guarding central bank assets against possible execution and enforcement proceedings for the satisfaction of a judicial claim.[26] This Act was adopted by the Chinese government for granting judicial immunity from such measures of constraint (such as-‘UNSCI Article 18 & 19 i.e. pre and post judgment from measures of constraint’) to central banks which enjoys official State immunity in China. Like the other jurisdictions discussed above, China too only grants such immunity to central bank until and unless such entities do not waive immunities (‘waiver doctrine’) in writing, or such entities are not earmarked for execution purposes in international disputes (‘assets earmarked for execution purpose’).

Rizaeff Freres v The Soviet Mercantile Fleet[27] isconsidered to be the revolutionary case in Chinese history concerning the law of sovereign immunity. This case has been cited by many Chinese scholars as the only case decided by the Chinese courts on the issue of sovereign immunity.[28] The court ultimately applied the doctrine of absolute immunity.[29] It is therefore, safe to say that, powerful trading and investment generating nations, like USA, UK and Russia, China too has on several occasions, through governmental orders, follows the notion of express and a written waiver of immunity from execution and also advocates the notion that ‘waiver of immunity from jurisdiction does not amount to waiver of immunity from execution and other measures of constraints.’[30] A clear, express and a written waiver is mandatory.

On 14 September 2005, China became a signatory to the UNSCI 2004 but has not yet ratified it. This signature itself marks China’s steps towards adopting the doctrine of restrictive immunity and, slowly yet gradually drifting away from age old plethoric doctrine of absolute immunity. In hindsight, this is not the case. The theory of absolute immunity was upheld as being China’s position on sovereign immunity in The FG Hemisphere case.

FG Hemisphere Associates LLC v. Democratic Republic of the Congo & Ors[31]

FG Hemisphere LLC filed claims in Hong Kong against the Democratic Republic of Congo and the China Railway Group Ltd, listed in Hong Kong as well as in Shanghai, and three of its subsidiaries, viz, China Railway Group (Hong Kong) Ltd, China Railway Resource Development Ltd and China Railway Sino-Congo Mining Ltd. The Secretary for Justice of Hong Kong subsequently intervened in the proceedings and thus became a party.[32] The Court of Final Appeal of the Hong Kong Special Administrative Region rendered its majority judgment on 8 June 2011.[33] This case sheds light on two things; one, the issue and law of State immunity from suit and execution available in the courts of Hong Kong and the stand of China with respect to absolute immunity.[34]

For the benefit and clarity on the issue of China’s stand on sovereign immunity, the author will only deal with the aspect of ‘absolute immunity’ that China argued as its position i.e. absolute immunity in terms of jurisdiction as well as execution.    

The main conclusion of the Court of Appeal was- (a) HKSAR (‘Hong Kong Special Administrative Region’) cannot, as a legal and constitutional principle, adhere to the doctrine of restrictive immunity against the doctrine of absolute immunity, which China practices and follows as part of their State immunity;[35] (b) The ‘three letters’ which were supplied to the Hong Kong courts by the office of the Commissioner of the Ministry of Foreign Affairs in China (‘OCMFA’) was influential in advocating and positioning China adhering to absolute immunity. In all three letters it was clearly stated that, “the consistent and principled position” of China is that a State and its property shall enjoy absolute immunity, including absolute immunity from jurisdiction and execution.[36] As we discussed above too, these letters also addressed the query that China has never applied formerly for its acceptance towards the doctrine of restrictive immunity; (c) The Hong Kong court noted the fact that these letters were not binding on the court to reach at its final decision but they advocated in favour of China following absolute immunity, more as an applicable theory rather than its stand of formal acceptance.[37] More so over, these letters served as a good judgment maker of China’s stand on sovereign immunity, being absolute and not restrictive; (d) China through the Hong Kong court proceedings, also addressed the elephant in the room when it said that signing UNSCI 2004, which adopts restrictive theory on sovereign immunity, moreover it applies when it comes to the matters of ‘immunity from execution’, does not have the potential to showcase its formal stand or change in stance from absolute to restrictive sovereign immunity. Chins argued that UNSCI 2004 has not been ratified by China for a very specific reason that the latest drafts of the Convention were not acceptable to China and that UNSCI 2004 in its entirety has not yet come into force and hence, not binding on China.

While the third letter dated 25 August 2010 was submitted by OCMFA before the Hong Kong court, China categorically stated that; ‘the regime of State immunity is an important aspect of relations between States as well as the handling of external relations by a State, and is an important component of the foreign affairs of the State. Each State adopts a regime of State immunity that is consistent with its own interests, in light of its national circumstances as well as foreign policy.’[38]

To this date, China applies ‘doctrine of absolute immunity’ and this was the general overview of The FG Hemisphere court in Hong Kong too. In addition, as China has very few legislative acts on sovereign immunity, one of the rare acts is its ‘2005 Law on Judicial Immunity from Measures of Constraint for the Property of Foreign Central Banks.’ This act directly shields such State properties as the central bank (including central bank funds and likewise assets of the bank and in the name of the bank) and therefore, they too enjoy absolute judicial immunity, particularly in the context of execution and attachment.

Concluding Remarks

The preceding discussion demonstrates that State immunity remains a significant hurdle in the enforcement of awards in ITA and ISDS. Although the doctrine has evolved substantially in recent decades in favour of more liberal exercises of jurisdiction when the State acts in a commercial or quasi-commercial capacity, immunity from forced execution of against sovereign assets remains a strongly followed doctrine in almost all of the above four mentioned jurisdictions.[39] In practice, the doctrine allows States to shield commercial assets from attachment and execution disregarding the nature or the purpose test of assets. Therefore, this not only questions the legitimacy and credibility of the current regime between a sovereign and foreign investors, but it also makes the system costly, time-consuming and frustrating for such investors.

ENDNOTES    

 [1] Kaj Hobér, Selected Writings on Investment Treaty Arbitration (Studentlitteratur 2013) 520.

 [2] Ibid  520.

 [3] Mr. Franz Sedelmayer v. The Russian Federation, SCC Arbitration Award of July 7, 1998 <https://www.italaw.com/cases/982> accessed 6 May 2020.

 [4] Mr. Franz Sedelmayer v The Russian Federation, Decision of the Swedish Supreme Court of 1st July 2011 in Case No-170-10 <https://www.italaw.com/cases/documents/1001> accessed 6 May 2020).

 [5]  Hobér (n 1) at The challenge proceedings in this case were brought under the old Swedish Arbitration Act of 1992, which was in force in Sweden until April 1, 1999, when the new Arbitration Act entered into force. The grounds for setting aside arbitral awards under the old Arbitration Act were more or less the same as under the new Act.

 [6]  Hobér (n 1) at The Russian Federation v. Sedalmayer, Judgement of the Stockholm District Court, December 18 2002, Case No. T6-583-98. For English translation of the Judgment of the Stockholm District Court, see  Stockholm International Arbitration Review 2005.

 [7]  Hobér (n 1).

 [8] ibid

 [9]  ibid

 [10] ibid      

 [11] Hobér (n 1)- Doctrine of Assertion is a Swedish law principle which means that the dispute falls within the jurisdiction of the arbitral tribunal if one of the parties asserts that its claim comes within the scope of the agreement which contains the arbitration clause, provided such assertion is not completely without foundation and provided that there is no dispute as to the validity of the arbitration agreement. See also The Russian Federation v. Sedalmayer, p. 17. See also L. Heuman, Arbitration Law of Sweden: Practice and Procedure 56-63 (2003).

 [12]  Hobér (n 1).

 [13]  ibid

 [14]  ibid

 [15] Hobér (n 1)  It should be noted, however, that the Russian Federation has signed-but not ratified the UN Convention; cf p. 502 et seq above.

 [16]  Hobér (n 1).

 [17] ibid

 [18] ibid

 [19]  ibid      .

 [20] Hobér (n 1) 507.

 [21] ibid

 [22] ibid      

 [23] Hobér (n 1) 507–8.

 [24] Kaj Hobér, Selected Writings on Investment Treaty Arbitration (Studentlitteratur 2013) n See Duhai QI, ‘State Immunity, China and Its Shifting Position’ (2008) 7(2) Chinese Journal of International Law 307-337. China has traditionally claimed absolute immunity for itself before foreign courts. Examples include Russell Jackson v People’s Republic of China [1986] 794 F.2d 1490 [1986],  Marvin L Morris v People’s Republic of China [2007] 478 F. Supp. 2d 561 (SDNY); Walters v People’s Republic of China [2009] 672 F. Supp. 2d 573 (SDNY) and Cybersitter LLC (Solid Oak Software) v People’s Republic of China [2010] CV 10-0038 (NDNY).

 [25] Lijiang Zhu, ‘State Immunity from Measures of Constraints for the Property of Foreign Central Banks: The Chinese Perspective’, 6 Chinese Journal of International Law 67–81 (2007).

 [26]  ibid

 [27] See Rizaeff Freres v. The Soviet Mercantile Fleet, 3 China L. Rev. 6 (Provisional Court of Shanghai 1927) 14 <https://caselaw.findlaw.com/us-supreme-court/348/356.html>  accessed 6 May 2020.

 [28]  ibid

 [29]  ibid  

 [30] Zhu (n 25).

 [31] Shu Shang and Wei Shen, ‘When the State Sovereign Immunity Rule Meets Sovereign Wealth Funds in the Post Financial Crisis Era: Is There Still a Black Hole in International Law?’ (2018) 31 Leiden Journal of International Law 915, see FG Hemisphere Associates LLC v. Democratic Republic of the Congo & Ors, FACV 5-7/2010 (‘Congo’).

 [32]  Hobér (n 1) – The FG Hemisphere case at page 509-520.

 [33]   ibid

 [34]  ibid

 [35]   ibid

 [36]   ibid

 [37]   ibid

 [38] Hobér (n 1). For a detailed summary of the judgement, see Article 16 i.e. ’Sovereign Immunity and International Arbitration-Recent Developments (from sub-clause 1 to 5) at pp. 516-518.

 [39] Craig Miles, ‘Sovereign Immunity’ in Raymond Doak Bishop (ed),Enforcement of Arbitral Awards Against Sovereigns (JurisNet LLC 2009).

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.