State Immunity and Its Impact on the Efficiency of International Commercial Arbitration as the Means of International Dispute Settlement

Khalida Azhigulova, MJur (Oxon)

Published in the Herald of the Kazakhstan Association of International Law, December 2008

I. Introduction

At the current stage of development of international economic relations, a state quite often appears not as a public law entity but also as a party to private relationships. A state may enter in various property relations with foreign natural and juridical persons, for example, it may order services and commodities, conclude concession contracts as well as arbitration agreements on dispute settlement.

In her article, the author touches upon the topical problems of the impact of the state immunity on the efficiency of international commercial arbitration. The article will further cover the practice of enforcement of arbitral awards rendered against a state party and the challenges that could be faced by a private party. In conclusion, the author will present international legal approaches and suggest ideas on striking the right balance in application of the concept of sovereign immunity at the international and national levels.

II. State Immunity in the Context of International Commercial Arbitration

а) Definition of commercial arbitration and state immunity

Before focusing on the essential part of the article, we will briefly touch upon the definition and particularities of the international commercial arbitration and its interrelation with the state immunity.

International commercial arbitration is one of the mechanisms of settlement of commercial disputes between parties of different nationalities. During the last thirty years, international commercial arbitration has won the preference of the parties to a dispute owing to its qualities, such as informal nature and relative expedition of the process, equality of the parties and party autonomy, and, finally, confidentiality of both the process and the award. However, despite the objective advantages of the commercial arbitration, its ultimate efficiency is largely preconditioned by a subjective factor, that is by the support given to it within the national legislation of various states. The most significant influence on the efficiency of arbitration is exerted by sovereign immunity, and in particular, by its content and extent of application.

In its turn, the state immunity (sovereign immunity) is a principle of international law, according to which a sovereign state is not subject to the jurisdiction of any other state and its official bodies. The most concise definition of the content of the state immunity is expressed in the famous Roman law maxim: “par in parem non habet imperium” (“an equal has no power over an equal”)[1].

The state immunity from foreign jurisdiction comprises several elements[2]:

• The judicial immunity: this is a jurisdictional immunity in a narrow sense, i.e. lack of jurisdiction of the courts of another state. According to the judicial immunity, no international (arbitral) court may arbitrarily exercise its jurisdiction in respect of another state; in other words, it may not bring a foreign state before the court as a defender. A state may appear as a defender in arbitral tribunal or court, but only upon its consent.
• Immunity from pre-judgment measures of constraint (seizure of state property): according to this type of immunity, the court adjudicating upon a private law dispute with participation of a foreign state is not allowed to apply any pre-judgment measures of constraint because such measures are of compulsory nature. If such measures concern a state and its property (attachment of state accounts in foreign banks, property inventory, restriction of a state’s right to use its property), from the immunity point of view, they shall not be allowed.
• Immunity from enforcement of an arbitral award: in respect of a state and its property, no measures of enforcement of the court judgment or arbitral award can be taken by any authority of this or any other foreign state. Even if a state has voluntarily consented to take part in the foreign judicial proceedings, any rendered decision can be enforced only on a voluntary basis.
• Immunity of state property: this means the inviolability of the state property located in the territory of another state.

Doctrines of State Immunity

Nowadays, a state often appears as a private juridical person (party of the civil law). There are two legal points of view whether the state immunity covers this type of relationship:

Doctrine of absolute immunity

This theory refers to the right of a state to use its immunity in full, all its elements; it extends to all state activities and all its property. This concept allows a state to waive its immunity (including the waiver of immunity under an agreement)[3].

Doctrine of functional (restrictive) immunity

This theory is based on the fundamental separation of state functions into two groups: of public law and private law nature. Depending on the nature of the functions, the state may appear as a sovereign (“jure imperii“), i.e. the holder of the public authority, or a private person (“jure gestionis“). In addition, a list of specific cases, when a state may not invoke its immunity, can be made. Nowadays, the theory of the functional (restrictive) immunity has been enshrined in the legislation of all states with progressive legislation, what serves the purpose of protection of lawful interests of private persons during their dealings with state parties.

b) Impact of the state immunity on the efficiency of international commercial arbitration

The above-considered types of state immunity operate independently from each other. For example, if a state gives its consent to consideration of a dispute, to which it is a party, in arbitral court/tribunal (in other words it has waived its judicial immunity), the immunity from pre-judgment measures of constraint and enforcement measures continue to be applicable, and the arbitral award can be enforced by a state only voluntarily. This very peculiarity may negatively affect the efficiency of international commercial arbitration as a mechanism of international dispute settlement.

As has been already noted, international commercial arbitration is becoming more and more popular as the means of dispute resolution due to its expedition, practicality, flexibility and confidentiality. However, even the rendered arbitral award does not give full guarantee that it will be enforced by a losing party. The business ethics presumes that arbitral awards should be enforced in good faith and voluntarily, however, in practice, this principle does not work, and instead the parties are dragged into following court proceedings to dispute the validity of arbitral awards.

Enforcement of foreign arbitral awards, i.e. the awards rendered outside the territory of a state, where any property of the losing party is located, is regulated by the 1958 New York UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This Convention contains an exhaustive list of grounds upon which recognition and enforcement of the award may be refused: for example, in case of procedural irregularities relating to improper notice given to the parties, composition of the arbitral authorities, etc.[4]

However, if the losing party is a state or its governmental authority, then the recognition and enforcement of the award may be refused on the basis of the state immunity as well: in particular, on the basis of the immunity from enforcement measures and/or the immunity of state property, which is subject to attachment for benefit of the winning party. If the losing state wants to avoid the enforcement of an arbitral award, it may invoke the state immunity from enforcement. At the current stage of development of private law relationships, this method to avoid performance of its legal obligations by a state may appear unfair vis-à-vis a private party, but on the other hand, this is the logical result of application of the state immunity. It follows that according to a general rule of state immunity, a foreign arbitral award will be enforced only if a state is willing to enforce it, what definitely puts a winning private party in an unequal position.

In the course of the long-standing practice, certain exceptions have been elaborated and reflected in the progressive legislation of many states. These exceptions provide for taking enforcement measures in respect of the state property if the state refuses to enforce an arbitral award in good faith. In its turn, this serves as a guarantee of interests of the winning private party. For instance, this is the contemporary position in the USA, the UK, France, Austria, Germany and many other states with advanced legislation.

However, the positions as to what is meant by the notion of “commercial property” vary across the states. For example, in the US the enforcement of a foreign arbitral award can be effected only in respect of the property, which is used in the commercial activity of a foreign state in the US territory or, if used outside the US territory, it creates “direct consequences” for the USA[5].

In England, the attachment can be effected in respect of any commercial property that is located in its territory irrespective whether this property has been used in the disputed activity of a foreign state.

Positions of states with regard to the burden and extent of proof of the use of state property in the commercial activity also vary. For instance, in the USA, the burden of proof lies with a foreign state, whereas in England – with a private party. Moreover, in England, only the property serving commercial purposes, and not mixed purposes, can be subject to attachment[6].

It should be noted that even if there is legislation restricting the state immunity, the competent courts of some states exhibit excessive inclination to defend the state property. Thus, in Alcom Ltd v. Columbia the Court of Appeal of England adjudicated that the bare statement of an Ambassador of a foreign state that its accounts in London were not serving commercial purposes was regarded as sufficient proof, whereas the burden of proof to the contrary rested with the private party[7].

Similar bias took place in the controversial dispute between the Russian Federation and a Swiss Corporation Noga Trading C.A. According to the arbitral award rendered by the Stockholm Chamber of Commerce, the bank accounts of the Russian diplomatic and trading representatives in France were seized. In addition, the sailer Sedov and the Russian aircrafts Su-30 MK and MiG-AT were also subject to attachment. According to the arbitration clause of the contract with Noga, the Russian Government voluntarily waived both its judicial immunity and the immunity from enforcement of arbitral award in respect of its state property abroad. However, the Appellate Court of Paris eventually came to a very entangled conclusion that neither the bank accounts, nor the other mentioned property of the Russian Federation were used in its commercial activity, despite the availability of facts to the contrary.

Because of such biased judgments, one may become of opinion that there is hardly any need to distinguish between the public and commercial property of a state; and hence, the doctrine of absolute immunity is being restored, what undermines the efficiency of international commercial arbitration as an efficient remedy for a winning party.

III. Conclusions and Recommendations

In light of the above, we can conclude that in order to strengthen the efficiency of international commercial arbitration, it is important to strike the optimal balance between the interests of the party that has been given the award, and the state-party that lost the case.

Presently, there is no single global practice of settlement of issues relating to application of the concept of state immunity. One of the approaches is seen in adoption of the relevant legislative acts on jurisdictional immunities of foreign states. However, different positions of states to the content and extent of the state immunitty often lead to a situation, when a winning private party may not be able to enforce the arbitral award. A similar situation occurred with the arbitral award in Libyan American Oil Company (LIAMCO) v. Libyan Arab Republic, whose recognition and enforcement was refused on various grounds of state immunity in the USA, Sweden and Switzerland[8].

This issue is especially topical for Kazakhstan: even though the civil procedural legislation of the state provides for restriction of the immunity of a foreign state upon the seizure of its property as a pre-judgment measure of constraint and attachment of this property pursuant to an appropriate law[9], no such law has yet been passed. Therefore, in the context of the contemporary position of the international community on prevalence of the doctrine of functional (restrictive) immunity over the absolute immunity, in Kazakhstan, the absolute immunity doctrine is still in effect, what hinders the efficient application of international commercial arbitration for international dispute settlement. Moreover, such a standpoint is quite damaging for Kazakhstan from the perspective of property interests. Until the relevant law on jurisdictional immunities is adopted in Kazakhstan, the property and other property interests of foreign states in the territory of Kazakhstan will be covered by the absolute immunity, whereas the state property of Kazakhstan abroad will not be covered by the same legal regime in those countries, where the state immunity is restricted.

In November 2008, the draft law on jurisdictional immunities, whose goal is to fill in this gap, was finally presented in the Parliament of Kazakhstan. This is a long-awaited event that gives hope for further integration of international standards on enforcement of foreign arbitral awards in the Kazakh legislation.

The second approach – more reasonable – is expressed in the unification of states’ positions on the content of the state immunity on the international level in the form of a convention. However, here as well there are certain difficulties, such as the consent of states to become a party to an international instrument. In 1972, the European Convention on State Immunity was adopted; this Convention specifies those cases when a state may not invoke its immunity. However, due to lack of flexibility of its provisions, it never entered into force.

On 2 December 2004, the UN General Assembly adopted the UN Convention on Jurisdictional Immunities of States and Their Property, which covers the dealings of States with natural and juridical persons. As of today, this Convention has not yet entered into force, but in comparison with the European Convention, it has a number of advantages. First, this Convention sets forth that if the state property serves the commercial purposes, then it is not covered by the immunity. Next, it contains a list of state property, which may not in any circumstances be subject to attachment or arrest: such as property and accounts of diplomatic missions, central bank, property of military character, property forming part of an exhibition and property forming part of the cultural heritage of the State[10].

In respect of the extent of the waiver of the state immunity, the Convention stipulates that the waiver of judicial immunity does not assume automatic waiver of the immunity from measures of constraint for enforcement of an arbitral award, and that some form of consent is still required[11]. Taking into account that the State and a private party are not initially equal to each other in terms of their legal status, from the perspective of private parties, the most comprehensive protection of their rights and interests would be ensured by the approach, when the waiver from the judicial immunity would automatically include the immunity from enforcement, and the burden of proof of the purposes of the use of state property would lie with the state and not a private party. However, it seems unlikely that any state will consent to such radical commitments; therefore, the current provisions of the UN Conventions appear most optimal and offering a unified approach to the content of the state immunity on the international level. As for the private parties, the solution may be the following: at the time of negotiating an arbitral clause, they should in advance reach an agreement with the state party that its waiver of the state immunity extends not only to the stage of arbitral proceedings but also to the stage of recognition and enforcement of the arbitral award. Indisputably, such an approach could add to the efficiency of the international commercial arbitration.

[1] N.A. Ushakov. Jurisdictional Immunities of States and Their Property. Мoscow,1993

[2] M.M. Boguslavskii. Private International Law. Second edition revised and complemented. Мoscow, 1994

[3] This principle of international law was considered in the arbitral award Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic, 1977: Collection of International Law (I.L.R). No. 62, 1982, page 178.

[4] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), Article 5

[5] Foreign State Immunity Act, USA, 1976, § 1605 (а) 2

[6] Alcom Ltd v. Colombia, and others [1984], collection of judgments of the Court of Appeal of England (A.C.) No. 580

[7] Ibid.

[8] Libyan-American Oil Company v. Government of the Libyan Arab Republic, 1977: Collection of International Law (I.L.R). No. 62, 1982, page 178

[9] Civil Procedural Code of Kazakhstan (No. 411-I, dated 13 July 1999)

[10] UN Convention on Jurisdictional Immunities of States and Their Property, Articles 10, 21

[11] Ibid., Article 20