Assets owned by a state-owned enterprise not immune from enforcement

Tepe Insaat Sanayii AS (Tepe), a Turkish construction company, and Boru Hatlari Ile Petrol Tasima AS (Botas), a Turkish state-owned enterprise, entered into two construction contracts. Following Botas’ termination of those contracts, Tepe successfully brought arbitration proceedings against it, obtaining two ICC awards worth approximately USD 100 million (the Awards). Tepe subsequently sought to enforce the Awards against shares held by Botas in two Jersey subsidiaries (the Shares) (the SIA extends to Jersey, with minor modifications). It was common ground that Botas was a ‘separate entity’ within the meaning of s14 SIA and therefore unable to claim state immunity itself.

The Privy Council rejected Botas’ appeal against the decision of the Court of Appeal of Jersey, which had held that Tepe was entitled to enforce the Awards against the Shares. The appeal focused on whether the Shares were the property of Botas or whether, as alleged by Botas, they were “the property of a State [ie Turkey]” under s13(2)(b) SIA, and hence immune from enforcement.

Ownership of assets, not purpose of use, is the key question

Botas’ first line of argument was that the reference to the “property of a State” in s13(2)(b) SIA should be interpreted by reference to whether the property was intended for use for commercial purposes as stated in s13(4) SIA (which operates as an exception to s13(2)(b)) (the Commercial Exception). The Privy Council disagreed. Whether assets are, in fact, the “property of a State” is a pre-condition to any consideration of whether the purpose of use of that property is commercial or sovereign. Otherwise, there would be no distinction between property owned by the State and that owned by a separate entity in order to enable them to carry out their business. As the Shares were owned by Botas, and not Turkey, the Commercial Exception could not be applied.

“Property of a State” requires a proprietary or legal interest, not simply control or possession over the property

Botas’ second line of argument was that "property" should be broadly interpreted to include not only those assets in which the Turkish State enjoys a proprietary or legal interest, but also those over which it exercises significant control in terms of their use and disposition. Again, the Privy Council disagreed. For enforcement purposes, the nature of ownership of the "property of a State" means only a proprietary or legal interest; mere possession or control over the property will not be sufficient. There must be a realisable value in the property against which execution can be carried out.

In this case, the Shares were held by and for Botas in Jersey, subject to Jersey law, and were capable of disposal. The fact that, under Turkish law, the Turkish State had “control” over the Shares, consisting of rights and obligations placed on Botas which affected Botas’ dealings with them, was irrelevant. The question of what constitutes "property" is a question for the court of the jurisdiction where enforcement is sought since enforcement only relates to property recognised as such under domestic law.

Comment

Although the question as to who owns the assets (the State or the separate entity) is likely to be a fact-specific one, this decision makes it clear that assets over which an SOE or SWF (assuming it is a separate legal entity) has a legal or proprietary interest, rather than the State, may not be protected by immunity from execution, even where day to day control over the assets sits with the State. Parties contracting with entities which are separate from the State may nevertheless continue to attempt to negotiate written consent to enforcement/execution (in addition to submission to jurisdiction language) in relation to the entity’s assets to avoid any argument that the findings in this case do not apply on the relevant facts (for example in cases where there may be some uncertainty as to whether the entity is indeed separate from the State).

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.​