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Why contracting with an international organisation is different

 

12 November 2012

Main issues to consider before entering into contracts with international organisations.  

Contracts between commercial entities and international organisations are increasingly common.  An ISDA or a loan agreement with an international organisation such as, for example, the European Bank for Reconstruction and Development (EBRD) may not seem that different from any other such transaction with another commercial entity.  However, there are specific considerations that have to be borne in mind when contracting with international organisations.  This article highlights the main issues to consider before entering into contracts with international organisations with a focus on the capacity of organisations to perform legal acts and the privileges and immunities that protect them from being sued or their assets from being seized.

Legal Personality

Before contracting with an international organisation it is important to check the international organisation's constituent documents to determine if it has: (a) the capacity to enter into a contract, and (b) the requisite legal personality to sue or be sued.  For example, Article 104 of the UN Charter provides that the UN shall enjoy such legal capacity as may be necessary for it to exercise its functions.  In other instances, the position may not be as clear-cut, and it may be necessary to examine if legal personality can be inferred from the functions of the international organisation.

Even if legal capacity of an international organisation can be established as a matter of international law, it might not be possible to initiate legal proceedings against the organisation in national courts.  In particular, some States adopt a dualistic theory to international law and require enabling legislation to give domestic legal force to international treaty rights and obligations.  The UK follows such an approach and the legal personality of an international organisation has to be specifically acknowledged by national legislation.  Under the International Organisations Act 1968 (the IOA), an international organisation can be declared by an Order in Council (a type of statutory instrument) to have the legal capacity of a body corporate under English law.  For example, the UN and the International Court of Justice received legal personality under the United Nations and International Court of Justice (Immunities and Privileges) Order 1974/1261 (the UN and ICJ Order). 

However, the position is not always clear.  If no Order in Council has been made under the IOA to recognise an international organisation, there is scope to argue that the organisation is not a recognised international organisation under English law.  In such instances, it is important to consider if the organisation in question is recognised under other enabling statutes such as the International Development Act 2002.  The UK has historically treated international organisations, which have not been given formal legal recognition through an Order in Council, as if they had distinct legal personality.  This approach has been approved of by the English court in JH Rayner (Mincing Lane) Ltd where the court noted that because the legislation giving effect to treaties in the UK has been inconsistent, there is a powerful argument that the courts should assume that the UK wishes to fulfil its international obligations and therefore recognise the status of an international organisation as such despite the absence of an Order in Council. 

Once legal personality has been established, national law will apply to the international organisation as if it were a body corporate in the jurisdiction.  However, unlike other body corporate, international organisations will typically enjoy certain privileges and immunities discussed next. 

Privileges and Immunities

The main privileges and immunities typically enjoyed by international organisations are immunities from jurisdiction and execution, the inviolability of premises and archives, currency and fiscal privileges and freedom of communication.  For example, Article 105 of the UN Charter provides for "such privileges and immunities as are necessary for the fulfilment of its purposes".  This subsequently led to the Convention on the Privileges and Immunities of the United Nations, which says in Section 2:

"The United Nations, its property and assets wherever located and by whomsoever held, shall enjoy immunity from every form of legal process except insofar as in any particular case it has expressly waived its immunity."

Such wide immunities are justified on the theory of 'functional necessity' – international organisations, their officials and agents enjoy such immunities as are necessary for their effective functioning.  Therefore, these privileges and immunities are not intended for personal benefit but for the effective functioning of the organisation.  

Not all immunity provisions are as extensive as the UN immunities.  For example, the EBRD constituent documents state that "actions may be brought against the Bank only in a court of competent jurisdiction in the territories of a member in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities."  The rationale for limiting the immunity from jurisdiction of the EBRD lie in its commercial lending nature, which should allow contractual parties to bring claims against the EBRD for breach of any commercial contracts.  However, caution must be taken when entering into a contract with an international organisation because other immunities may undermine the utility of a legal action, such as immunity of assets from seizure.  It is also important to note that some international organisations may not enjoy any immunities and States, particularly those that are not its members, may not obliged to grant any immunity to those organisations.  The prevailing view is that the conferment of legal personality on an international organisation implies immunity, but this is by no means always recognised by national courts.

The existence of privileges and immunities must also be considered in terms of national laws.  The IOA and the International Organisations Immunities Act 1945 are examples of implementing legislation in the UK and the US, respectively, wherein the empowering provisions are applied to named international organisations by specific secondary acts.  For example, the UN and ICJ Order are statutory instruments that confer privileges and immunities to the UN and ICJ that are set out in the IOA, which includes immunity from "suit and legal process". 

Waiver of Immunities

To the extent an international organisation enjoys certain immunities, the two main ways in which the scope of such immunities can be restricted are: (a) a narrow interpretation of any immunities in implementing legislation by national courts, and (b) a waiver of immunity by the international organisation.

As far as application of immunities by national courts is concerned, two main trends can be observed.  First, national courts applying the theory of 'functional necessity' may be willing to find that no privileges and immunities exist or have been waived whenever they are not necessary to facilitate the functions of an international organisation under the international treaty in question.  The functional necessity test is favoured amongst scholars.  Second, a developing trend amongst some countries, such as Italy and the US, is to adopt a similar approach to international organisations as they do to States, i.e. by making a distinction between acts that are governmental (acts jure imperii) and those that are commercial (acts jure gestionis).  The idea behind this is that privileges and immunities should not extend to commercial acts.

Finally, international organisations have the ability to waive any immunities they may have when entering into commercial contracts.  Such a waiver should be express and caution must be taken that the waiver is broad enough to cover both immunity from jurisdiction or suit and immunity of assets from seizure or the inviolability of an organisation's premises.  Judgments or awards obtained in national courts or from an arbitral tribunal may need to be enforced in third party countries where the organisation's assets are located.  In such instances, local law advice would be required to determine whether enforcement is possible.

Practical Tips

In summary, when contracting with an international organisation, it is important to consider:

  •  the legal capacity of the organisation to enter into commercial contracts and submit to the jurisdiction of national courts or an arbitral tribunal;
  • the legal personality of the organisation to sue and be sued before national courts or an arbitral tribunal;
  • where applicable, if the relevant enabling legislation has been enacted;
  •  the privileges and immunities of the organisation and appropriate waiver of those immunities; and
  •  the enforcement of any judgments or arbitral awards in countries where the organisation's assets are located.
 

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