Arbitration and state immunity: a minefield of issues in recent High Court judgments
16 June 2016
Two recent cases considered by the English High Court remind us that state immunity issues are critical in arbitration-related enforcement proceedings. In both cases, the court had the opportunity to clarify the scope of certain provisions of the State Immunity Act 1978 (SIA) and the procedure to follow when filing an application without notice seeking enforcement against a state party. In both cases, the court ultimately rejected the claims to immunity raised by the state entities involved and granted enforcement of arbitral decisions.
In Pearl v Kurdistan, the court considered immunity-based objections raised by the Kurdistan Regional Government of Iraq (KRG) in the context of an application for enforcement of a peremptory order issued by a London Court of International Arbitration (LCIA) tribunal in a commercial arbitration relating to a petroleum contract. After defective service issues had been dealt with, Burton J granted enforcement of the peremptory order. The judge rejected KRG’s claims to sovereign immunity on the basis that KRG, as a “separate entity” within the meaning of section 14 of the SIA, was not immune from the jurisdiction of the English courts because KRG was exercising its own sovereign authority, not that of the state of which it forms a part, that is, the Federal Republic of Iraq.
In Gold Reserve v Venezuela, the court analysed Venezuela’s claim to immunity in the context of enforcement of an investment arbitral award. The award required Venezuela to pay damages to the claimant investor as compensation for violation of the investor’s rights under the Canada-Venezuela Bilateral Investment Treaty (BIT). Gold Reserve submitted an ex parte application to the English court for permission to enforce the award as if it were a judgment of the court. Phillips J made the requested order ex parte on documents alone and the order was then served on Venezuela. Venezuela sought to set aside the order, invoking, among other things, immunity under the SIA and alleging a breach by the claimants’ advisers of the duty of full and frank disclosure in ex parte proceedings.
Both cases have moved on considerably since these judgments were reported here:
In Pearl v Kurdistan, the LCIA tribunal issued a second partial final award in late November 2015, ordering KRG to pay a certain amount to the claimants (arguably superseding the peremptory order of the arbitral tribunal, which was the subject of the enforcement proceeding in the English court).
The dispute between Venezuela and Gold Reserve was settled in late February 2016.
However, these judgments remain of key significance for arbitration practitioners, litigators and in-house counsel considering enforcement actions in the UK, particularly in mining and oil and gas disputes, given that these areas very often involve contracting with states or state entities.
Oil and gas contracts involve exercise of sovereign authority
In Pearl, the High Court considered whether the contract for the exploitation of gas fields located in Kurdistan was an exercise of sovereign authority, as opposed to a commercial transaction within the meaning of section 13 SIA. Although Burton J ultimately rejected KRG’s claim to sovereign immunity, this judgment is noteworthy because it characterised a petroleum contract involving the vesting of long-term rights relating to the ownership and management of oil and gas as a transaction involving the exercise of sovereign authority. This judgment goes further than the Court of Appeal in Svenska v Lithuania and is the first English authority reaching a definitive answer on this issue.
This characterisation could apply to any transaction involving exploitation of a state’s natural resources such as exploration, development and production of oil and gas, coal, gold, uranium and other natural resources. Burton J’s judgment could therefore potentially be critically important to a wide range of disputes concerning a variety of energy and mining agreements.
Waiver of state immunity
In both cases, the court interpreted section 9 SIA and found that there had been a waiver of immunity because the party claiming immunity had given its consent to arbitrate or there was an express waiver clause in the contract. In Pearl, the court found that, even if it were entitled to invoke state immunity, KRG waived it in the arbitration clause and an express, short-form waiver clause in the contract between the claimants and the KRG. While immunity waiver clauses should be drafted comprehensively, this judgment shows that the courts are also willing to construe them pragmatically if it is clear that, even in the absence of comprehensive waiver language, a general waiver of sovereign immunity is intended.
In Gold Reserve, the court rejected the state’s immunity plea on grounds of waiver resulting from the state’s standing offer to arbitrate the dispute with the investor under the BIT. It followed that Venezuela could not rely on state immunity in the award enforcement proceedings. This ruling is relevant to any investor-state dispute.
Procedure relating to enforcement applications without notice
In both cases, the court reminded law firms of their obligations of full and frank disclosure when submitting an application without notice to the court seeking permission to enforce an arbitral order or award. The judges applied this requirement strictly and were highly, and, of course, publicly, critical of lawyers who failed to raise fully immunity issues before a judge considering an application without notice. In Pearl, the claimants’ solicitors’ failure to disclose immunity issues was characterised as “seriously culpable” and sufficiently serious to warrant setting aside the orders obtained. In Gold Reserve, the claimant’s counsel’s failure to disclose Venezuela’s potential jurisdictional objections (previously made in enforcement proceedings in Paris and Luxembourg) was considered a “serious failure” to give full and frank disclosure with regard to the state immunity defence. Although the judge exercised his discretion to uphold the ex parte order, Gold Reserve was ordered to pay Venezuela’s costs on an indemnity basis.
In both cases, the court also emphasised that, once the ex parte order is issued, it must be served through the Foreign and Commonwealth Office pursuant to section 12 SIA. There is no obligation to serve the arbitration claim form on the defendant, but only the resulting order if granted.
Practical tips: do you have the right reflexes?
The above cases highlight the importance of having the right reflexes when advising clients, both in relation to drafting contracts and in disputes arising out of such agreements. Here are a few tips to start with:
Firstly, at the stage of advising clients in relation to drafting contracts or arbitration clauses:
Be alert to the involvement of states or state-owned entities.
Consider local law opinions on immunity status under the law of the forum or jurisdictions where recognition or enforcement is likely to be sought.
Include a broad waiver of immunity from your counterparty, both for jurisdictional immunity and immunity from execution.
If acting for a client who may benefit from state immunity, consider how best to preserve that immunity entitlement and carefully craft any waiver clause.
Secondly, at the enforcement stage:
Identify any parties with the potential right to raise state immunity issues.
For any enforcement application ex parte, bear in mind and fully comply with full and frank disclosure obligations.
Consider how to effect service, being mindful of the section 12 SIA requirements.
Follow the procedure: do not rely on courts exercising their discretion to deny setting aside an improperly obtained ex parte order.
Avoid costs orders against your clients and reputational damage to your firm.
This article first appeared on the Practical Law Arbitration Blog on 5 April 2016.