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Kurdistan regional government's sovereign immunity plea fails in English court

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01 February 2016

The English High Court in Pearl Petroleum Co Ltd & ors v Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm), 20 November 2015 rejected immunity claims by the Kurdistan Regional Government of Iraq (KRG) in the context of a dispute relating to a petroleum contract.  It ordered KRG to comply with a peremptory order which an LCIA arbitral tribunal had issued after KRG had failed to comply with an earlier interim payment order.  The judgment expressly characterises a petroleum contract as a transaction involving the exercise of sovereign authority within the meaning of the State Immunity Act 1978.  It also contains an interesting analysis of the immunity waiver language in the petroleum contract.  Finally, it is a good illustration of one way in which a party can seek to enforce interim relief ordered by an arbitral tribunal against a non-compliant counterparty.

Background

In 2007, the claimants and the Kurdistan Regional Government of Iraq (KRG) entered into a contract (Contract) under which the claimants would exclusively exploit two gas fields in KRG for at least 25 years. A dispute arose in 2009, with KRG contesting the extent of the claimants’ rights over the two gas fields and with the claimants alleging that KRG was underpaying for the hydrocarbons that they were producing.

In 2013, the claimants started an LCIA arbitration in England under the Contract. In response, KRG stopped paying the claimants altogether, although it still took hydrocarbons. KRG’s failure to pay apparently threatened the solvency of one of the claimants. The claimants therefore applied, successfully, to the LCIA tribunal for interim relief. The tribunal ordered KRG to make payments to the claimants, on a provisional basis, at the prices that KRG had been paying before the dispute arose. The tribunal considered this order necessary to maintain the status quo because there was an “appreciable risk that Dana [ie, one of the three claimants] will become insolvent or at any rate suffer unnecessary loss through distressed sale of assets if payments are not resumed before the award”.

KRG ignored the tribunal’s order, so the claimants applied for, and obtained, a “peremptory order” under s41 of the Arbitration Act 1996 (AA) ordering KRG to pay to the claimants the sum of USD 100 million within 30 days. A peremptory order is an order that a tribunal may make when a party fails to comply with any tribunal order without showing sufficient cause. KRG also failed to comply with the peremptory order.

Under s42 AA, a party to an arbitration in England can apply to the English court for an order requiring a party to comply with a peremptory order, where either: (i) the parties agree (unlikely); or (ii) (more likely) with the tribunal’s permission. The advantage of this route is that non-compliance with a court order opens up the prospect of sanctions for contempt of court.

KRG’s sovereign immunity plea under the State Immunity Act 1978 (SIA)

KRG raised several defences to the claimants’ s42 AA application. This article focuses on KRG’s immunity defences. The court’s analysis of these defences was complex, but three aspects in particular are of interest.

Oil and gas contract is exercise of sovereign authority

A first issue was whether the Contract was an exercise of sovereign authority, as opposed to a commercial transaction. This issue was relevant in this case because (as explained below) KRG could only claim immunity as a “separate entity” of the Federal Republic of Iraq (FRI) if (among other things) it was exercising the sovereign authority of a State. The distinction is also relevant more generally because, under s3 SIA, a State is not immune in proceedings relating to a commercial transaction.

Previously, there was no decisive authority on this question under English law, although the Court of Appeal in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania (No 2) [2005] EWHC 2437 (Comm) had suggested that a contract to exploit oil reserves in a State was likely to involve an exercise of sovereign authority. Burton J concluded that the Contract was entered into in the exercise of sovereign authority. Under the Iraqi Constitution, oil and gas resources are a sovereign asset, so a contract for their exploitation had to be a sovereign act.

Whether KRG was exercising the sovereign authority of the Iraqi State

KRG is not a State. It was common ground between the parties that it is a constituent region of FRI and therefore not a “separate entity” under s14 SIA. Whereas a State is automatically entitled to any immunities available under the SIA (subject to their exceptions), a “separate entity” is only entitled to immunity if (among other requirements) “the proceedings relate to anything done by it in the exercise of sovereign authority”.

Although Burton J had held that the Contract was an exercise of sovereign authority, he held that immunity was only available to KRG under s14 SIA if KRG was exercising the sovereign authority of FRI. Based on an analysis of the Iraqi Constitution, he held that KRG was exercising its own sovereign authority (ie sovereign authority of KRG, the constituent region of FRI) rather than that of FRI itself. Burton J noted that it was common ground between the parties that there had been a dispute between FRI and KRG “as to who is entitled to control of Kurdistan’s oil and gas resources”. The judge appeared to have reasoned that, because FRI disputed KRG’s authority to control KRG’s oil and gas resources, KRG could not have acted in the exercise of FRI’s sovereign authority. On this basis, the Court concluded that KRG did not enjoy the immunity protection under s14(2) SIA.

KRG’s waiver of immunity

The Contract contained a short-form waiver of immunity clause as follows: “The KRG waives on its own behalf and that of [FRI] any claim to immunity for itself and assets”. KRG argued that: (i) the interim payment order was in substance a mandatory injunction; and (ii) the clause did not waive its right to immunity from injunctive relief under s13(2)(a) SIA (“relief shall not be given against a State by way of injunction or order for specific performance or for the recovery of land or other property” – unless the State waives its immunity under s13(3)).

Contract drafters will be aware that immunity waiver clauses are construed strictly. We would not recommend the short-form language seen in this case. Nevertheless, Burton J held that, even if the interim payment order were regarded as a form of injunction, the waiver clause would be effective. He held that any waiver of immunity from suit should be sufficient to amount to a waiver of immunity from injunctive relief, and that the clause was sufficient to amount to waiver of immunity from suit. He was not concerned by the absence of a specific waiver in respect of injunctive relief. In any event, the issue did not strictly arise because, he held, the interim payment order was not a form of injunctive relief.

COMMENT

This judgment dealt with the unusual relationship between KRG and FRI. Nevertheless, aspects of the sovereign immunity analysis are of broader interest to those contracting with sovereigns, states, territorial subdivisions of a state and/or state-owned entities. In particular:

  • The judgment expressly characterises a petroleum contract as a transaction involving the exercise of sovereign authority within the meaning of the SIA.
  • Any plea for immunity by a territorial subdivision of a state will be harder following this judgment, as a result of the judge’s ruling that a separate entity can only assert immunity if it is exercising the sovereign authority of the State (as opposed to any sovereign authority of the separate entity).
  • While immunity waiver clauses should be drafted comprehensively, this judgment shows that the courts may be 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.

The decision is also a useful reminder of one approach that a party can take when the other side in arbitration fails to comply with a tribunal order. If a peremptory order of an arbitral tribunal is enforced by the English courts under s42 AA, non-compliance becomes a contempt of court rather than merely a failure to comply with a tribunal’s order. This could bring significant pressure to bear on a recalcitrant party and increase the likelihood of compliance with the order.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.​​​