Recent developments in immunity
Immunity is a complex area of the law that is often critical to the approach taken by sovereign entities, central banks and international organizations on commercial transactions. It is also an area of ever increasing interest to commercial parties (and their credit committees), as the sovereign wealth fund sector continues its dramatic expansion and supranational organisations play an increasingly prominent role in financing transactions and major projects, especially in emerging markets. This article examines the implications for banks of a recent U.S. Supreme Court ruling and also summarises immunity developments in other jurisdictions.
U.S. Supreme Court raises the bar for challenges to sovereign immunity
In Bolivarian Republic of Venezuela v Helmerich & Payne International Drilling Co,1 the U.S. Supreme Court ruled that a plaintiff suing a foreign sovereign must prove that the sovereign is not immune from suit under the Foreign Sovereign Immunities Act of 1976 (FSIA) before it can litigate the merits of the claims. For financial institutions that find themselves litigating in U.S. courts over a sovereign’s contractual obligations, whilst this can be burdensome, it should at least mean that costly litigation over the merits will be avoided unless and until there is a finding that an exception to a sovereign’s immunity has been established. The decision highlights the importance, in particular in connection with financial instruments involving sovereigns that are not subject to arbitration, of insisting on clear immunitywaivers.
The case involved an alleged unlawful expropriation by Venezuela’s state-owned oil company of oil rigs owned by Helmerich & Payne’s Venezuelan subsidiary.2 Helmerich & Payne and its subsidiary brought proceedings against Venezuela in the U.S. district court for Washington, D.C., seeking compensation. Venezuela challenged jurisdiction based on sovereign immunity grounds.
Exception to sovereign immunity – the ‘expropriation’ exception
This case involved the FSIA’s expropriation exception, which provides that a foreign state is not immune from suits concerning “rights in property taken in violation of international law”.3 However, the Supreme Court’s ruling is of wider significance for other exceptions to immunity.
The district court found that the FSIA’s expropriation exception did not apply, but on appeal, the Court of Appeals for the D.C. Circuit allowed the case to proceed on the basis that Helmerich & Payne had advanced “non‑frivolous” arguments that the exception “might” apply.4
Immunity issue should be resolved at the outset
The Supreme Court unanimously rejected the Court of Appeals’ “non-frivolous argument” standard, and held that a plaintiff invoking the FSIA’s expropriation exception must prove that the exception applies “as near to the outset of the case as is reasonably possible”.5 The Supreme Court concluded that the “non‑frivolous argument” standard deprives foreign sovereigns and their counterparties of the jurisdictional clarity the FSIA is meant toprovide.6
Importantly, the Supreme Court recognizes that there may be circumstances in which resolving jurisdictional questions will decide some or all of the merits.7 Where that is the case, the Supreme Court says, “so be it”.8
Ruling likely to apply to other immunity exceptions
While Helmerich & Payne addresses only the FSIA’s expropriation exception, our expectation is that the standard articulated in Helmerich & Payne will apply to all of the FSIA’s exceptions, including those based on waiver or a sovereign’s commercial activity or tortious conduct.9 There is nothing about the Supreme Court’s reasoning in Helmerich & Payne suggesting it should be limited to the expropriation exception, and the FSIA’s statutory structure should result in each of the FSIA’s exceptions being subject to the early proof of jurisdiction now required by Helmerich & Payne.
The message of Helmerich & Payne is clear: a plaintiff seeking to sue a sovereign will need to prove, at the outset, that an exception to FSIA immunity applies. In practice, this will mean a more expensive and faster-paced initial phase of litigation over the applicability of the FSIA’s exceptions in a given case, which may require discovery and an evidentiary hearing.10 In cases where jurisdictional issues are bound up with the merits – for example, in cases where jurisdiction is based on a sovereign’s commission of tortious conduct in the United States – the decision in Helmerich & Payne may effectively require expedited litigation of the entirety of a case’s merits.
The procedure for litigating FSIA exceptions outlined in Helmerich & Payne should, however, lead to more predictability and certainty, as courts should develop clearer precedent on the scope of FSIA exceptions, where decisions that have addressed only whether an arguable basis for the applicability of an exception exists have provided little guidance. In addition, whether a sovereign has waived immunity or has engaged in commercial activity, which generally is not tied to the merits, should be decided immediately, so that neither a sovereign nor its counterparty will waste time on merits-related issues without certainty over whether the sovereign has meritorious FSIA‑based jurisdictional objections. For financial institutions that find themselves litigating in U.S. courts over a sovereign’s contractual obligations, this should mean that costly litigation over the merits will be avoided unless and until there is a finding that an exception to a sovereign’s immunity has been established. The decision once again highlights the importance, in particular in connection with financial instruments involving sovereigns that are not subject to arbitration, of insisting on clear immunity waivers.
The impact that the bifurcated procedure required by Helmerich& Payne will have on a sovereign’s appetite for early dispute resolution through settlement is less clear. In cases where the claim of jurisdiction is not tied to the merits, there may be less of an incentive for a sovereign to settle prior to a determination ofjurisdiction, as such a determination will be made in an initial, separate phase of litigation before the merits are reached. But, where a threshold determination of jurisdiction would require intrusive discovery into a sovereign’s affairs, sovereigns may be more open to earlier settlement discussions, as sovereigns are generally resistant to discovery, particularly in the tort and terrorism context.
Even if establishing exceptions to immunity presents a greater challenge, the presence of substantial sovereign assets in theUnited States should ensurethat U.S. courts remain an attractive forum for pursuing sovereigns. The decision should not have animpact on the availability orattractiveness of arbitration pursuant to bilateral investment treaties.
Global developments on immunity
Immunity is an area of the law where we have seen other significant legal developments.
In the U.S., the implementation of JASTA11 (which followed Congress overriding President Obama’s earlier veto of the legislation) in September 2016 increased litigation risk for sovereigns and commercial parties associated with sovereigns. JASTA was notable for two reasons: first, it broadened the types of civil claims that may be brought in the U.S. courts for acts of international terrorism under theAnti-Terrorism Act (ATA); secondly, and more controversially, JASTA created anew exception to sovereign immunity under the federal Foreign Sovereign Immunities Act (FSIA) for situations in which ATA claims are brought against foreign governments or individual foreign officials in relation to acts of terrorism that cause injury in the United States. These new rules now apply to all terrorism claims currently pending or on appeal in U.S. courts, as well as any new claims that may be brought.
In Russia, new legislation was introduced in 2015 relating to the immunity of foreign sovereigns (Federal Law No 297-F2). Although this law was apparently based on the United Nations Convention on Jurisdictional Immunities of States and their Property, it does not afford central banks special immunity, and introduced a concept of reciprocity when determining the approach to immunity. Effectively, the new regime means that where the law of a foreign state fails to afford immunity to Russia and its assets, the Russian courts will not allow that foreign state to claim immunity before them.
In France, there has been a recent codification of the law relating to a foreign state’s immunity from execution. The concept of immunity has also continued to be tested before the French courts (and the International Court of Justice) in the context of long running litigation involving the former vice president of Equatorial Guinea.
In the UK, we have continued to see litigation concerning attempts by commercial parties to enforce against assets said to belong to sovereigns and central banks.12 Moreover we have also seen high profile litigation against the UK Government relating to allegations of complicity in torture, with the English courts grappling with complex concepts of non‑justiciability under international law in a time of war.13
Finally, we continue to see an increase in claims brought before the International Centre for Settlement of Investment Disputes (ICSID), with many commercial parties now seeking to structure investments so as to take advantage of the rights offered byinvestment treaties of the homestate.
1.137 S. Ct. 1312 (2017)
2.Id. at 1317.
3.28 U.S.C. § 1605(a)(3).
4. Helmerich & Payne, 137 S. Ct. at 1318 (quotations and citations omitted).
5. Id. at 1316-17 (citation omitted). Justice Neil Gorsuch, who joined the Supreme Court after oral argument in Helmerich & Payne, did not participate in the consideration or decision of thecase.
6. Id. at 1321.
7. Id. at 1319.
9. 28 U.S.C. § 1605(a)(1), (2), (5).
10/ See Helmerich & Payne, 137 S. Ct. at 1316 (“where jurisdictional questions turn upon further factual development, the trial judge may take evidence and resolve relevant factual disputes”).
11. Justice Against Sponsors of Terrorism Act (2016).
12. Eg FG Hemisphere (2012), Servaas v Rafidian Bank (2012), Taurus v Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Iraq (2015), Avionics v Nigeria (2016).
13. Belhaj v Straw & ors (2017).
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – email@example.com, or tel +44 20 3088 3710.