Legal Briefing

SerVaas v Rafidain: state immunity

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Dispute resolution | 01 December 2012

The Supreme Court has recently considered the issue of state immunity in the case of SerVaas Incorporated v Rafidain Bank & ors [2012].

The issues in the appeal were concerned with the scope of a state’s immunity from execution in respect of a judgment already made against it, rather than a state’s immunity from suit. However, the case offers an opportunity to revisit the law in this area in general.


STATE IMMUNITY UNDER ENGLISH LAW

The English law on state immunity is contained in the State Immunity Act (SIA) 1978. Unless otherwise stated, all references to section numbers in this article should be taken as references to the SIA 1978.

Section 1 provides that a state is immune from the jurisdiction of the UK courts unless one of the exceptions set out in the Act applies.

This immunity applies to any foreign or Commonwealth state, other than the UK, to the sovereign or other head of that state in their public capacity, and to the government and government departments of that state (s14(1)).

EXCEPTIONS TO STATE 
IMMUNITY FROM SUIT

A state may waive its right to immunity by submitting to the jurisdiction of the UK courts, either at the incidence of proceedings being commenced or by prior agreement. Some of the more common ways in which such an agreement is formed are: (i) by a contractual clause to that effect (s2); or (ii) by agreeing to submit any dispute(s) to arbitration (s9).

The other principal commercial exceptions to a state’s immunity from suit are contained in s3. These can apply where proceedings are commenced in relation to a commercial transaction entered into by the state (s3(1)(a)) or in relation to a contractual obligation of the state that is to be performed wholly or partly in the UK (s3(1)(b)).

For the purposes of s3(1)(a), a commercial transaction is defined as any contract for the supply of goods or services, any loan or other transaction for the provision of finance, and any other transaction or activity in which the state engages otherwise than in the exercise of sovereign authority.

Other specific exceptions to state immunity from suit include proceedings relating to:

  1. a contract of employment between the state and an individual made in the UK or relating to work performed in the UK (s4(1));
  2. a state’s interest in immovable property in the UK (s6(1)); and
  3. any patent, trade-mark or design rights belonging to a state and registered or protected in the UK (s7).

However, these exceptions may not apply if the matter appears to fall into the category of disputes involving state authorities that are deemed inappropriate for judicial intervention. In Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 & 5) [2002], Lord Nicholls said:

‘It may not be easy to generalise 
about such acts, and the application of the principle may be fact sensitive. Guidance, however, is to be found in 
such considerations as whether there 
are “judicial or manageable standards” 
by which to resolve the dispute, 
whether the court would be in “a judicial no-man’s land”, or perhaps whether there would be embarrassment in our foreign relations, at any rate if that possibility was drawn to the court’s attention by the executive. Sensitive issues involving diplomacy between states, or uncertain or controversial issues of international law, may be other examples of situations calling for judicial restraint.’

This principle was more recently applied in JSC BTA Bank v Ablyazov [2011], where an application to stay certain claims on the ground that they were part of an illegal scheme was non-justiciable on the grounds that the applicant was inviting the court to decide whether the nationalisation of a Kazakh bank was illegal and invalid.

STATE IMMUNITY FROM ENFORCEMENT

Assuming one of the exceptions to immunity from suit set out above can be established, in order to achieve an effective remedy against a state, it will still be necessary to find an exception to the rules providing immunity from enforcement.

Section 13(2) prevents a party from obtaining an injunction, specific performance or an order for the recovery of land or other property against a state (s13(2)(a)) or enforcing any judgment or arbitration award against the property of a state (s13(2)(b)).

There are two principal exceptions to this immunity from enforcement: (i) where the state gives written consent (s13(3)); and (ii) judgment or arbitration awards may be enforced against state property that is for the time being in use or intended for use for commercial purposes (s13(4) – emphasis added).

Importantly, in respect of the s13(3) exception, a clause submitting to the jurisdiction of the UK courts will not necessarily be sufficient to imply submission to the enforcement jurisdiction of the UK courts. In order to give the greatest assurance, any contractual drafting to this effect should explicitly refer to immunity being waived in respect of enforcement.

There is a further exception contained in s31 of the Civil Jurisdiction and Judgments Act 1982. This provides that a judgment given by a court of an overseas country against a state, other than the UK or the state to which that court belongs, will be recognised and enforced in the UK: if it would be recognised and enforced if it had not been given against a state; and the foreign court would have had jurisdiction in the matter if it had applied rules corresponding to those in ss2-11 of the SIA 1978.

It was the s13(4) exception to the general rule against execution and, in particular, the interpretation of the words: ‘in use or intended for use for commercial purposes’ which was at issue inSerVaas v Rafidain.

SERVAAS V RAFIDAIN

Background

SerVaas brought proceedings in the Commercial Court in Paris against the Iraqi Ministry of Industry in relation to a commercial agreement for the supply of equipment and machinery. SerVaas obtained judgment in default and sought to enforce that judgment in England and Wales by applying for a third-party debt order over sums payable to the Iraqi government by Rafidain Bank.

Rafidain was in liquidation in England and Wales and was due to pay significant sums to the Iraqi government under a scheme of arrangement as part of a restructuring of debts that had been created during the regime of Saddam Hussein. The debts had originally arisen from commercial transactions between Rafidain and its commercial creditors, but were assigned to the Iraqi government from the existing creditors of Rafidain under the auspices of the Iraq Debt Reconciliation Office.

On 30 November 2010, the Chargé d’Affaires and Head of Mission of the embassy of Iraq in London signed a certificate stating that claims made by 
Iraq under the scheme of arrangement, or any assets or distributions received in respect of them, had never been used and were not in use or intended for use by or 
on behalf of Iraq for any commercial purpose. It was common ground that the effect of this certificate was to create an evidential burden on SerVaas to show that the Iraqi government’s claims under the scheme of arrangement were not immune from execution on the basis set out in 
the certificate.

It was also common ground that:

  1. the Iraqi government was liable for the debts of the Ministry with which SerVaas had contracted;
  2. monies payable under the scheme of arrangement to Iraq were a debt and 
a chose in action and as such they 
were property within the meaning of s13(2)(b); and
  3. that Iraq’s stated intention was to transfer the proceeds of the claims to the Development Fund for Iraq.

The proceedings were summary proceedings and accordingly, the question was whether or not there was any real prospect of SerVaas rebutting the presumption created by the certificate.

SerVaas’ position was that the nature of the transaction which gave rise to Rafidain’s liability was entirely commercial, accordingly, that brought the case within the provisions of s13(4) and ought to enable SerVaas to enforce their judgment by way of a third-party debt order.

DECISION

SerVaas’ application for a third-party debt order was dismissed at first instance by Arnold J in December 2010 and by the Court of Appeal by a majority in November 2011.

On 17 August 2012, the Supreme Court upheld the decisions of the lower courts.

It found that the expression ‘in use for commercial purposes’ should be given its ordinary natural meaning and:

‘… it would not be an ordinary use of language to say that a debt arising from a transaction was “in use” for that transaction’.

Lord Clark contrasted the language of s13(4) with s3(1), which refers to proceedings ‘relating to’ a commercial transaction, and s10, which refers to claims ‘in connection with’ a particular transaction or obligation. He concluded that the narrow wording ‘in use or intended for use’ used in s13(4) was intentional.

Drawing support from the case of Alcom Ltd v Republic of Columbia [1984], Lord Clark upheld the distinction drawn by the lower courts between the origin of funds and the use to which they were put. He also found support for this distinction in US case law in the application of the Foreign Sovereign Immunities Act 1976, a precursor to the 
SIA 1978.

Lord Clark cited the US case of Connecticut Bank of Commerce v Republic of Congo [2002], in which Judge Garza said:

‘… to use property for commercial activity, within the ordinary meaning of “use”, would be to put the property in the service of the commercial activity, to carry out the activity by means of the property. Here, the royalty obligations in question represent the revenue, the income, from allegedly commercial activities. In ordinary usage, we would not say that the revenue from a transaction is “used for” that transaction’.

Accordingly, SerVaas’ appeal was dismissed.

COMMENT

This case may be cited as demonstrating the limitations of the commercial purpose exemption, particularly given the way in which the Iraqi embassy’s certificate placed the burden on SerVaas to rebut the presumption of immunity, and the lack of interest shown by the court in widening the plain meaning of the words in s13(4).

However, the distinction maintained in the judgment between the source of property and its use should also apply if a state were to seek to rely on the sovereign origin of funds to justify immunity from execution. Based on this judgment, if such funds were being used for a commercial purpose, it seems that, irrespective of their origin, they would not be immune.

More generally, it is essential that parties dealing with states or state-related entities should ensure absolute clarity as to the identity of the party with which they are dealing. Where that party is likely to be able to claim immunity, further consideration will need to be given to ensure that the relevant state entity explicitly submits to the jurisdiction of the UK courts and to their enforcement jurisdiction.

If this is not possible, and reliance is placed on one of the exceptions to immunity set out in the SIA 1978, it is necessary to ensure that the property over which recourse is to be sought satisfies any requirements of the relevant exception. If the commercial purpose exception is being relied upon, it will be necessary to ensure that the relevant property is in use or intended for use for commercial purposes and will remain so until the point of enforcement.

UN CONVENTION

The UK is a signatory to the United Nations Convention on Jurisdictional Immunities of States and Their Property. This is not yet in force but may be implemented in the future. The differences between this and the SIA 1978 are minimal and, importantly for the purpose of this article, the distinction between the state’s immunity from adjudication and its immunity from enforcement remains.

In respect of the exceptions to the immunity from suit, the convention does not provide an exception to state immunity for contractual obligations to be performed wholly or partly in the UK. The exceptions in respect of contracts of employment, immovable property and intellectual property referred 
to above are broadly maintained.

In respect of exceptions to the immunity from enforcement, the Convention provides that a state will lose its immunity from enforcement if it has consented to the enforcement measures. Enforcement action can also be taken against property that is in use or intended for use by the state for ‘other than government non-commercial purposes’, thereby rephrasing and, potentially, slightly widening the existing ‘commercial purposes’ requirement that was considered in SerVaas v Rafidain.

TWO FURTHER POINTS TO NOTE

Position of central banks

For the purposes of s13(4), property of a state’s central bank or other monetary authority is not regarded as being in use or intended for use for commercial purposes (s14(4)). However, state funds held by a private bank, if in use for commercial purposes, will not be immune (Orascom Telecom v Chad [2008]).

Separate entities

There are certain entities in respect of which there may be an ambiguity as to whether or not they can properly claim to be an emanation of the state and thereby entitled to claim state immunity. Section 14(1) provides that state immunity cannot be claimed by any entity (a ‘separate entity’) which is distinct from the executive organs of the government of the state. Section 14(2) goes on to explain that such an entity will only be able to claim immunity if the proceedings relate to something done by 
it in the exercise of sovereign authority 
and where a state would have been 
immune in the relevant circumstances. 
Such immunity was claimed, unsuccessfully, by Iraqi Airways in Kuwait Airways Corporation v Iraqi Airways Company 
[1995] where its involvement in the 
seizure, removal and subsequent retention of aircraft pursuant to a legislative decree was not considered sufficient to bring it within the ambit of s14(2).