INTERNATIONAL LAW OF STATE IMMUNITY AND ARBITRAL AWARDS: HOPELESS LABOR OF SISYPHUS?
- By Harshal Morwale
Keywords – arbitration, state immunity, enforcement of awards.
Imagine rolling a massive boulder up a hill, and right before it reaches the top of that hill, the boulder starts rolling down. This is not just the story of Sisyphus but also the situation of the award holders seeking to execute their awards against a State which raises the defence of State immunity. State immunity in the context of international arbitration has been subject to almost microscopic analysis throughout the years. However, the question which still remains relevant is that, does the international law of State immunity strike the right balance between protecting a State’s assets from interference by private parties and giving effect to a State’s undertakings in relation to an arbitration procedure?
To answer this question, it is first essential to differentiate between two kinds of State immunity – immunity from jurisdiction and immunity from execution. It goes without saying that when a State consents to arbitration, it waives the jurisdictional immunity. State immunity from execution is something that has certain grey areas that this piece attempts to highlight. The article first discusses the interpretation of State immunity in the UK and France with respect to arbitral awards. Then it deals with certain issues worth highlighting which emanate from the United Nations Convention on Jurisdictional Immunities of States and Their Property.
Treatment of State immunity in the UK and France
In order to attempt to answer the question raised at the outset, it is crucial to first look at the treatment of State immunity in the domestic sphere, for two reasons. Firstly, to highlight the direction in which the jurisprudence is heading. Secondly, even if the arbitration is anchored in international law, the final fruition of the remedy will nevertheless come from a domestic court. In other words, to seek the execution, the holder of an international arbitral award will, at some point, have to go to the domestic courts of the countries in which it seeks to attach the property of the award-debtor State.
The approach in the UK can be noted in Orascom v. Chad, where the Court considered both the exceptions to State immunity (waiver of immunity and property sought to be attached is used for commercial purposes) under the State immunity Act, 1978. The Court ruled that – firstly, consent to arbitration cannot be construed as a waiver of immunity from execution. Secondly, if a bank account sought to be attached is used for commercial purpose, it falls within the scope of the commercial use exception to State immunity provided.
The French approach is an interesting one. There are two cases which are noteworthy - Creighton case and Commisimpex case. In the Creighton case, the Court said that by agreeing to ICC arbitration, Qatar had waived its immunity. The decision was highly controversial and rightly so. However, in the Commisimpex case, the Court ruled that the mere mention in the contract of a waiver does not show the unambiguous intention of the State to waive immunity and immunity from execution should be “expressly” waived.
If we view the approaches in the UK and France together in chronological order, it seems that jurisprudence has moved towards a stronger application of State immunity. In the Creighton case (2000), State immunity was waived impliedly. In the Orascom case (2008), the implied waiver argument was rejected straightaway. In fact, in Orascom case, the Court criticized the approach taken by the French Court of Cassation in Creighton case. While, in Commisimpex case (2018), State immunity needed an express waiver.
The landscape of State immunity on the customary international law plane
The prime instrument in the current context would be the United Nations Convention on Jurisdictional Immunities of States and Their Property. It goes without saying that the instrument, despite not being in force, is representative of the customary international law principles regarding State immunity. Three articles of this instrument warrant analysis for the topic - Article 19 together with Article 21, and Article 20.
Article 19 titled State immunity from post-judgment measures of constraint mirrors Article 18 (State immunity from pre-judgment measures of constraint) except for Article 19 (c) which reads–
“No post-judgment measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a Court of another State unless and except to the extent that: [...]”
“[...] (c) it has been established that the property is specifically in use or intended for use by the State for other than government non-commercial purposes and is in the territory of the State of the forum, provided that post-judgment measures of constraint may only be taken against property that has a connection with the entity against which the proceeding was directed.” (emphasis added)
The plain reading of the provision suggests that in order to obtain an execution against a State, the property must be first – connected with the said State and second – must be in use for purposes other than government non-commercial purposes.
Article 21 takes the force of Article 19 (c) one step further. Article 21 specifies particular categories of property which exclude certain properties from being used for the purposes in Article 19 (c). On top of that, Article 21 (1) (a) specifies “[…] property, including any bank account, which is used or intended for use of the functions of the diplomatic mission […]”. Who decides what the property’s intended use was? Here lies a strategic advantage for the States, by simply characterizing the property or bank account as “intended for use” of diplomatic functions and it shall be protected under the blanket of the State immunity. Hence, even if a party finds a property under Article 19 (c), Article 21 will represent another barrier.
Article 20 is titled ‘effect of consent to jurisdiction to measures of constraint’. As mentioned at the outset, when the State agrees to arbitration, it waives the jurisdictional immunity. Building upon that, Article 20, in essence, says that when a State waives immunity from jurisdiction, it shall not mean waiver on immunity from execution. In other words, Article 20 requires a separate and arguably express waiver from execution. The provision appears to have a significant gap. A State might agree to arbitration, and if it loses, it might just argue immunity from execution wherever the execution is sought, essentially leaving the award holder with nothing but an expensive piece of paper.
The point worth highlighting here is that the above-mentioned provisions try to emulate something that has happened in both the jurisdictions discussed earlier. However, these provisions are (problematically) much narrower. Hence, it is safe to say that the current international law framework contains a significant number of roadblocks for the parties trying to execute their awards.
It can be argued that the State’s (diplomatic, military, cultural) assets need protection from private commercial interests, and immunity is an essential tool for ensuring such protection. However, this raises a question – how would you define an asset as diplomatic or commercial? Where do you draw the line? What if the account purported to be attached is a mixed-use account? A 2-step waiver, first from jurisdiction and then from execution, wouldn’t that put the States in the position of “I will only play if I win”?
Asset tracing prior to initiating execution proceedings has emerged as a solution. However, from the cost point of view, this solution might not be ideal. The award holder having already incurred substantial cost on arbitration would then have to spend more on asset tracing. The award holder will then proceed to local court litigation where the State might just characterize the property or the account as intended to be used for diplomatic functions and get away with it.
As it stands, the domestic jurisprudence is moving towards stronger immunity, and international law is almost airtight already. The current framework of State immunity clearly seems tilted in favor of States. Given the discussed domestic and international legal landscape coupled with the sophistication with which States are concealing their properties abroad, it looks extremely difficult (in terms of time, resources and procedure) to get anything meaningful out of a State against which there is an arbitral award. A big chunk of awards against Russia and Argentina which are still unenforced testify to the problem.
Harshal Morwale is an India qualified lawyer currently pursuing the MIDS Geneva L.L.M Program. He is an accredited tribunal secretary by the HKIAC, and has performed this role in multiple international commercial arbitrations.
Preferred Method of Citation – Harshal Morwale, ‘International Law of State Immunity and Arbitral Awards: Hopeless Labor of Sisyphus?’ (ICAR, 23 July 2020) < insert link of the accessed article here>.
The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.