Sovereign immunity: suing the state

Answer

There are many ways one can seek legal redress against sovereign states. In England and Wales, for example, the principle of judicial review has become an effective (if evolving) way to check executive power.

Internationally, the number of investor-state dispute settlement (ISDS) mechanisms included in international trade and investment treaties has expanded. The number of disputes being resolved via these systems has correspondingly risen (at least 65 in 2017). The treaties usually specify a set of rules which govern a dispute, such as the rules of the World Bank's International Centre for Settlement of Investment Disputes or the United Nations Commission on International Trade Law arbitration rules.

These (and the numerous other) processes are beyond the scope of this article, which will instead assess the rules governing commercial litigation involving sovereign entities in the Courts of England & Wales (the Courts) and drafting tips for commercial entities seeking to avoid litigation.  

Litigating against the state – initial considerations

There are two chief principles to consider before litigation against the state is commenced: the principle of ‘state immunity’ and the ‘foreign act of state’ doctrine.  

Introduction to the rules of state immunity

The principle of state immunity means that, except in certain situations, sovereign states cannot be held liable for their actions when they act as sovereign states.

As a principle of international law, state immunity dates back to at least the Treaty of Westphalia of 1648. The international position is currently being codified in the United Nations Convention on Jurisdictional Immunities of States and their Property (which has yet to be ratified). However, in England & Wales the current law that governs state immunity is the State Immunity Act 1978 (SIA 1978).

The SIA 1978 covers two things:

• whether a dispute involving a state can be adjudicated in England & Wales; and
• whether an award or judgment arising from that adjudication can be enforced.

These are separate questions. It is possible for a dispute to be deemed adjudicable, but for the successful claimant to be prevented from enforcing the award or judgement against the sovereign state.

It is therefore important to ensure (as much as possible) that costs are not wasted to win a claim against a state, only to discover that your client is prohibited from enforcing its win. Drafting the underlying contract between the parties in a certain ways will maximise the chance that courts will rule a dispute is both adjudicable and open for enforcement.

The law on state immunity – gateways to adjudication

The guiding principle of the SIA 1978 is that the courts have no jurisdiction to adjudicate disputes against sovereign states unless one of the exceptions set out in the act applies. The four most relevant exception ( or 'gateways') for a commercial actor are:

• where the sovereign state has submitted to the jurisdiction of the UK courts;
• the dispute relates to a 'commercial transaction' entered into by the state;
• the proceedings relate to a 'contractual obligation' to be performed wholly or partly in the UK; or
• the state has agreed to submit the dispute to arbitration.

Gateway one: submission

Sovereign entities may be found to have submitted to the jurisdiction of the courts in the following ways:

• prior written agreement;
• submitting to the jurisdiction after the dispute has arisen; or
• by carrying out steps in relation to proceedings.

This gateway can be seen to mirror the provisions set out in Articles 25 and 26 of the Recast Brussels Regulations, which deals with jurisdictional issues between EU member states. Once a state submits to a court's jurisdiction, the submission is irrevocable. Submission is judged on the ordinary principles of English law which govern submission under the CPR 11. For example, while filing a defence would count as submission, making an interim application to dispute jurisdiction by claiming sovereign immunity would not.

Gateway two: commercial transactions

The SIA 1978 is clear that contracts for the supply of goods and services or financing transactions (but generally not contracts of employment) are adjudicable.

The SIA 1978 also has a blanket provision covering all commercial transactions which the sovereign state enters "otherwise than in the exercise of sovereign authority". This means a state can be sued in tort as well as for breach of contract.

This gateway can prove tricky (except in the most obvious cases) as there are no clear tests to help determine when a commercial transaction is in the exercise of sovereign authority. In fact certain activities seemingly unrelated to sovereign authority have been judged to be so, making it hard to predict whether this gateway will be available for a client. For example, a joint venture to exploit natural resources on sovereign territory was considered an exercise of sovereign authority, despite it being a seemingly commercial transaction.  

The lines are especially blurry when commercial entities act as or like a sovereign. For example, English courts rejected claims for sovereign immunity over a government bank account that was being used to hold funds to repay World Bank debts, on the basis that the account was being used for commercial activities (the service of a debt). On the other hand, a third-party debt order was not available against a bank as the court found it was acting as a central bank, an obvious exercise of sovereign power (central banks enjoy blanket immunity above and beyond states).

Gateway three: state contractual obligation to be performed in the UK

This gateway is both broader and narrower than the commercial transaction gateway. While the it must be a specifically contractual obligation to be performed in the UK, the gateway covers any contractual obligation. This includes contracts where the state is exercising sovereign authority (except where the contract is governed by the administrative law of the state and was made in the state’s territory).

Gateway four: arbitration

The last gateway is where a state has agreed to submit a dispute to arbitration. As outlined above, these clauses are often included in treaties governing foreign investment or trade, and can somewhat be seen as an extension of gateway one as the state is seen to have submitted to the jurisdiction of the relevant court when they signed the treaty. This means disputes emerging out of those treaties can be adjudicated in the courts unless prohibited by the relevant treaty or other legislation. In fact, many disputes emerge in the UK when arbitrations break down or when one party seeks to enforce arbitral awards against a third party.

Judicial restraint and foreign act of state doctrine

Even if one of the above gateways applies, in certain cases the courts will follow ‘judicial restraint’ when dealing with certain sensitive matters. This is often where the issue is political or where it can only be resolved between states and is not a private law matter.. It is hard to predict when a court will apply this doctrine.

The foreign act of state doctrine is simpler. English courts will not determine the lawfulness or validity of sovereign acts of foreign states, as these are nonjusticiable. This also applies to arbitration conducted in England. An example is when the English courts would not rule on whether nationalisation of a foreign bank was illegal, as it was done via primary legislation. This defence is absolute, but states cannot raise this defence if the claim does not involve any challenge to the lawfulness of an act by the state.

Moreover, this doctrine is subject to public policy concerns. For example, the courts have overruled the doctrine (although not lightly) where it was believed that justice could not be obtained in a foreign court. This is because the courts separate executive and legislative acts (which are covered by foreign act of state doctrine) and the acts of the judiciary (which are not). The doctrine will also be put aside where the acts are in breach of established rules of international law.

The law on state immunity – immunity from enforcement

Even if a claimant is granted access to the court via one of the above gateways, and does not fall afoul of any of the above doctrines, it might not be able to enforce the judgement even if it wins.

The SIA 1978 prevents a party from either:

• obtaining injunctive relief, order for specific performance or order for the recovery of land or other property against the state; or
• enforcing any judgement or arbitral award against the property of the state.

This is unless the following exceptions are met:

• the state gives written consent to provide either limited or full relief; or
• when enforcing judgements or arbitration awards only, the claimant enforces against property that is in use or intended use for 'commercial purposes'.

These immunities also apply to arbitration claims brought under investment treaties.

Consent to enforcement

There are no hard and fast rules for what constitutes consent. A contractual clause where a state submits to the jurisdiction of the English courts will not necessarily cover consent to enforcement. It is therefore imperative that contracts contain carefully drafted jurisdiction clauses (see drafting tips below).

Property in use for commercial purposes

Thankfully, the definition for commercial purposes mirrors the definition of commercial transactions above.

However, the property must be used or intended to be used exclusively for commercial purposes. For example, a bank account being used for commercial purposes and also to cover diplomatic costs could not be subject to enforcement action. However, the providence of the property does not matter. As long as it is exclusively in use for commercial purposes, it is open to enforcement actions, even if previously it had been used for sovereign acts. An example might be a monarchs residence that is now leased for commercial purposes.

As mentioned above, this is not true for any property that belongs to a state central bank or monetary authority, which possess higher levels of immunity and cannot be enforced against.

Separate entities doctrine

As a result of the above, parties will often want to contract with an entity that is not directly the state so as to avoid these issues. However:

• if the proceedings relate to things done by the separate entity in the exercise of sovereign authority; and
• none of the exceptions set out above apply that would strip it of state immunity,

the courts will consider the separate entity as if it were the state and grant it immunity anyway.

Again, the separate entity may waive its immunity to adjudication by submitting to the jurisdiction of the court, but it will still benefit from enforcement immunity. A waiver to that immunity also exists.

What is a separate entity?

A separate entity is defined in the SIA 1978 as "any entity...which is distinct from the executive organs of government of the state and capable of suing or being sued." This is not particularly clear, but as this issue has not been extensively litigated, there are only a few working definitions. For example:

• the court has found that where a foreign decree establishing a bank stated that the bank would not be responsible for the obligations of the state, the bank counted as a separate entity; and
• a corporation, even if owned and capitalised solely by the state, would count as a separate entity if it had a separate legal identity and decision-making independence.

A good working definition is that a separate entity would likely resemble "an autonomous subsidiary" of "a parent company", as opposed to "a branch office".

Separate entities acting in the exercise of sovereign immunity

Even if the other side is deemed a separate entity, it might still qualify for sovereign immunity if it acts as if exercising sovereign authority. Certain functions have been found to be sovereign acts even if done by separate entities, especially when it comes to dealing with financial instruments. For example, issuing bank notes and regulating foreign exchange reserves have been found to be sovereign acts, but issuing letters of credit or promissory notes are not.

Drafting tips

When drafting a contract between private and state entities, the "submission to jurisdiction" clause must be drafted so that the state specifically waives immunity and submits to the courts.

The submission to jurisdiction and the submission to enforcement must be made separately and explicitly. This will not be implied by the courts.

Care should be taken to ensure the person signing on behalf of the state has authority to do so and has authority to waive the states immunity from adjudication and immunity. It will not be enough to assume that diplomatic personnel or employees of a state-entity automatically have this right.

It is common for the state to waive immunity for itself and over its property so as to be clear that it is allowing enforcement against that property.

If possible, deal with separate entities as a way of mitigating the risk of sovereign immunity. However, When dealing with a separate entity, there is the risk the courts will find it an extension of the sovereign state anyway. Jurisdiction clauses should be drafted in line with those included in a contract with a sovereign state as a precaution.

When dealing with foreign banks that have links to the state, be careful the bank could not be found to be or acting as a central bank, as these enjoy higher levels of immunity. Look carefully at what activities they partake in and whether it could be considered an extension of the state.  

Max Rossiter is a trainee solicitor at RPC.