Arbitration: Enforcement v Sovereign Immunity a clash of policy

Transcription

1 Arbitration: Enforcement v Sovereign Immunity a clash of policy Presented by Hermione Rose Williams Advocates BVI

2 Outline: A talk which examines the tension between the enforcement of arbitral awards and the doctrine of sovereign immunity. Pro-enforcement policy underpinning the New York Convention threatened by the difficulties posed by the defence of sovereign immunity. Why important? Arbitration is preferred method of dispute resolution in international commercial contracts and increasingly one of more parties is a state or state controlled entity. If awards emanating from arbitration cannot be enforced compromises integrity of arbitration process as an alternative to litigation.

3 Structure of Talk: 3 Sections 1. Examine the enforcement mechanism for arbitral awards: a) UN Convention on Recognition and Empowerment of Foreign Arbitral Awards b) Position in BVI under old Arbitration Ordinance (Cap 6) c) Position of BVI following enactment of Arbitration Act Introduction to sovereign immunity: a) History and underlying policy b) Absolute and restrictive immunity c) Sovereign immunity in the BVI 3. Sovereign immunity as a defence: a) To jurisdiction b) To enforcement

4 1) Enforcement mechanism for arbitral awards a) The UN Convention on Recognition and enforcement of Foreign Arbitral Awards ( the NYC ). - Arbitration recognized as suitable means for resolving disputes - Result of international effort to make arbitration a more certain efficient means of resolving disputes - Goal of NYC is to encourage recognition and enforcement in international contracts - Unify standards by which agreements to arbitrate are observed and arbitration awards are enforced in signatory countries

5 1) Enforcement mechanism for arbitral awards a) The UN Convention on Recognition and enforcement of Foreign Arbitral Awards ( the NYC ). 145 signatories since ratified in 1958 all pledged to enforce arbitration awards made in any NYC country with ease. NYC derives authority from national courts. Simple enforcement mechanism: Party simply submits the arbitration agreement & certified copy of the award to enforcement court Court recognizes award and issues order to other party to satisfy the claim awarded Cheaper, easier, faster to enforce arbitration awards than court judgments

6 1) Enforcement mechanism for arbitral awards a) The UN Convention on Recognition and enforcement of Foreign Arbitral Awards ( the NYC ). Only seven defences recognized court has discretion and can still enforce award even if opposing party has made out it s case. Clear pro-enforcement policy underlying the NYC.

7 1) Enforcement mechanism for arbitral awards b) Position in BVI pre 2013 Arbitration Ordinance 1976 ( The 1976 Act ) In the BVI, the primary basis for enforcement of arbitration awards before 2013, was the 1976 Act. - Provides for domestic arbitration and enforcement of such orders that emanate from such arbitrations - Provides for enforcement of NYC awards Parliament set out whole of NYC in schedule to the 1976 Act noted by BVI CoA in IPOC International Growth Fund Ltd LV Finance Group Ltd (No 30 of 2006).

8 1) Enforcement mechanism for arbitral awards b) Position in BVI pre 2013 Arbitration Ordinance 1976 ( The 1976 Act ) Scheme of 1976, line intention of NYC, give effect to NYC by a simple, straightforward method of enforcement of arbitration awards. Arbitration awards can be enforced in same manner as a judgment of court and where leave granted judgment entered in terms of award. Procedure apply for order to recognize and explore the award or judgment of court using CPR rule and section 35 of 1976 Act. So possible to enforce convention awards in the BVI even though BVI not signatory.

9 1) Enforcement mechanism for arbitral awards b) Position in BVI pre 2013 Arbitration Ordinance 1976 ( The 1976 Act ) But not possible to enforce BVI arbitration awards in other NYC countries. BVI Court was seen to give effect to Arbitration Agreements and treated arbitration awards as final and binding unless exceptions shown. IPOC International COA: BVI court can only refuse to grant an order to register and enforce a NYC award on one of the grounds set out in section 36.

10 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 NYC has been extended to the BVI since 25 May Oct 2014: New Arbitration Act which adopts the UNCITRAL Model Law on International Commercial Arbitration ( the Model Law ) provides rules on arbitration procedure with few minor exceptions. Incorporation of Model Law ensures BVI arbitration will be conducted according to international standards. Arbitrations in BVI recognized in most countries in the world.

11 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 Establishment of International Arbitration center under Arbitration Act 2013: - Promote arbitration - Provide necessary facilities for arbitral proceedings - Provide access to parties who choose to settle disputes by arbitration - Ensure arbitration in BVI is fast, efficient and productive

12 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 Enforcement mechanism under Arbitration Act 2013: - No distinction between domestic and foreign awards - Distinction between NYC and non-nyc awards - Court has more discretion regarding latter i.e.. can refuse enforcement for any other reason it considers it just to do so not only the statutory grounds - Limited grounds to challenge the enforcement of NYC awards

13 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 Enforcement mechanism under Arbitration Act 2013: - Starting point is that enforcement is mandatory unless otherwise shown burden is on the defendant. - For purpose of this talk Act codifies BVI s pro-enforcement regime aligns BVI with the rest of the international community.

14 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 Enforcement of an award may be refused if the person against whom it is invoked proves one of the grounds set out in section 83 of the Act. BVI Court may also refuse to enforce an arbitration award if: the award is in respect of a matter which is not capable of settlement by arbitration under the laws of the Virgin Islands; It would be contrary to public policy to enforce the award; or For any other reason the Court considers it just to do so.

15 1) Enforcement mechanism for arbitral awards c) Position in the BVI under Arbitration Act 2013 Application for leave to enforce the award under CPR Once registered it can be enforced as if it were BVI judgment Application can be made without notice

16 2) Introduction to Sovereign Immunity a) History and underlying policy Derives from principle that sovereign state cannot commit a legal wrong and is immune from civil suit or criminal prosecution. A state is exempt from jurisdiction of foreign courts and enforcement of court orders UNLESS it waives it s immunity. Two forms of sovereign immunity: - Immunity from suit - Immunity from execution

17 2) Introduction to Sovereign Immunity b) Two approaches to sovereign immunity: Absolute immunity sovereign state is immune without exception still applies in Hong Kong Restrictive immunity jurisdiction of national courts exercised over foreign states in claims against them that arose out of commercial or trading transactions into which they had entered with private individuals.

18 2) Introduction to Sovereign Immunity b) Two approaches to sovereign immunity: Response to recognition that states were increasingly engaging either directly or through separate entities that were emanations of the executive government of the state, in commercial and trading transactions with private citizens of other states. Tradex Trading Corporation v Central Bank of Nigeria (1977) 1 QB 529 marked the absorption by common law of restrictive theory of sovereign immunity.

19 2) Introduction to Sovereign Immunity b) Two approaches to sovereign immunity: Critical distinction drawn by international law and English law between: - What a state did in the exercise of it s sovereign authority - Enjoys immunity - What a state did in the course of it s trading or commercial activities No immunity So with arbitration increasingly becoming the dispute resolution method of choice in international contracts, foreseeable that many contracts between states or state controlled entities and commercial parties will include an arbitration clause. Q: Will the state raise defence of sovereign immunity?

20 2) Introduction to Sovereign Immunity c) Sovereign Immunity in the BVI England s state Immunity Act 1978, ( the 1978 Act ) extended to the BVI by State Immunity (Overseas Territories) order 1979 ( the 1979 Order ) Act adopts a restrictive immunity approach BUT commences in Section 1 (1) by restating as respects foreign states the general principle of absolute sovereign immunity. Principle is subject to wide-ranging exceptions. Section 1 (2) Notably, even if a state does not appear in the proceedings in question, a court to has a mandatory obligation to give effect to the immunity covered in section 1 (1).

21 2) Introduction to Sovereign Immunity c) Sovereign Immunity in the BVI For the purposes of this talk, 3 exceptions to sovereign immunity that are of interest. The 1978 Act provides that states are immune from the jurisdiction of the court except where: 1) The state submitted to the jurisdiction of the BVI court (Section 2). 2) The transaction entered into was of a commercial nature (Section 3). 3) The state has agreed in writing to submit a dispute which has arisen or may arise, to arbitration (Section 9). In such circumstances the state is not immune as respect proceedings which relate to arbitration.

22 2) Introduction to Sovereign Immunity c) Sovereign Immunity in the BVI Exception in section 9 extends to all agreements to arbitrate, whether or not the proceedings relate to a commercial transaction. The sovereign immunity defense may be involved by the state at the jurisdictional stage. E.g. State may argue no valid arbitration agreement. Jurisdictional arguments need to be raised early.

23 3) Sovereign immunity as a defence a) To jurisdiction To recap, Section 9 of 1978 Act provides that where a state has agreed in writing to submit a dispute which has arisen or may arise to arbitration, the state is not immune as respects proceedings in the courts in the BVI which relate to arbitration. Q: Are proceedings for leave to register and enforce an arbitral award proceedings which relate to the arbitration? Yes

24 3) Sovereign immunity as a defence a) To jurisdiction Svenska Petroleum Exploration AB v Government of the Republic of Lithuania (2006) EWCA Civ 1529 Arbitration is a consensual procedure. Principle underlying section 9 is that if state has agreed to submit to arbitration it has rendered itself amenable to such process as may be necessary to render the arbitration effective.

25 3) Sovereign immunity as a defence a) To jurisdiction Svenska Petroleum Exploration AB v Government of the Republic of Lithuania (2006) EWCA Civ 1529 The Act itself draws a distinction between proceedings which relate to the arbitration (section 9) and process in respect of property for the enforcement of an award (section 13). In our view an application for leave to enforce an award as a judgment is one aspect of its recognition and as such is the final stage in rendering the arbitral procedure effective. Enforcement by execution on property belonging the state is another matter, as section 13 makes clear. It is quite clear that it was the intention of Parliament in formulating section 9 of the Act in unrestricted terms that applications for leave to enforce arbitration awards should not attract sovereign immunity, whether the award was domestic or foreign.

26 3) Sovereign immunity as a defence a) To jurisdiction Svenska followed by the English Commercial Court in LR Avionics Technologies Limited v The Federal Republic of Nigeria [2016] EWHC 1761 approved by the Supreme Court in NML Capital Ltd v Republic of Argentina [2011] UKSC 11 In NML: a major purpose of section 9 must on any view have been to lift state immunity in respect of enforcement of arbitration awards against states, including foreign arbitration awards since the subsection is in general terms Enforcement by execution on property belonging to the State is another matter.

27 3) Sovereign immunity as a defence b) To enforcement Recall that CoA in Svenska drew a distinction between an application for recognition or enforcement of an award (which is a proceeding which relates to the arbitration and therefore does not attract immunity) and enforcement by execution on property of the state which does attract immunity unless the commercial exception in section 13 applies. Fact that a State has contracted to refer disputes to arbitration does not amount to a waiver of immunity for the purposes of execution on its property. Even if party succeeds in having an arbitration award recognised in the BVI & has leave to enforce: Q: Can they locate state-owned assets within the BVI that are available for execution?

28 3) Sovereign immunity as a defence b) To enforcement In all cases, enforcement by execution on state-owned property is governed by section 13 of the 1978 Act. This provides, so far as is relevant: 13 (2) Subject to subsections (3) and (4) below (a) 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; and (b) the property of a State shall not be subject to any process for the enforcement of a judgment or arbitration award or, in an action in rem, for its arrest, detention or sale. (3) Subsection (2) above does not prevent the giving of any relief or the issue of any process with the written consent of the State concerned; (4) Subsection (2)(b) above does not prevent the issue of any process in respect of property which is for the time being in use or intended for use for commercial purposes (5) The head of a State's diplomatic mission in the United Kingdom, or the person for the time being performing his functions, shall be deemed to have authority to given on behalf of the state any such consent as is mentioned in subsection (3) above and, for the purposes of subsection (4) above, his certificate to the effect that any property is not in use or intended for use by or on behalf of the state for commercial purposes shall be accepted as sufficient evidence of that fact unless the contrary is proved.

29 3) Sovereign immunity as a defence b) To enforcement In summary this means: Property of the State is immune from execution unless: The State has given its written consent or The relevant property is for the time being in use or intended for use for commercial purposes. Submission for purposes of adjudicative jurisdiction under section 2 does not imply submission to the enforcement jurisdiction of the courts.

30 3) Sovereign immunity as a defence b) To enforcement Where a section 13(5) certificate has been provided, burden is on claimant to prove that the property is in use or intended for use for commercial purposes: As section 1(2) requires a court to give effect to state immunity even if the State does not appear in the proceedings, the service of a section 13(5). Certificate does not make the task of establishing that the assets are for the time being in use in commercial purposes materially any more difficult. A Certificate does deprive a claimant the opportunity of asserting that an appropriate inference can be drawn from a State s failure to serve one.

31 3) Sovereign immunity as a defence b) To enforcement Commercial purposes is given extended meaning by section 17(1) of the 1978 Act commercial purposes means purposes of such transactions or activities as are mentioned in section 3(3). Section 3(3) provides that that commercial transaction means: any contract for the supply of goods or services; any loan or other transaction for the provision of finance any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and any other transaction or activity (whether or a commercial, industrial, financial, professional or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority.

32 3) Sovereign immunity as a defence b) To enforcement Note that 3(3)(a) refers to any contract for the supply of goods or services. So: A contract for the supply of good or services will qualify as a commercial transaction even if it is entered into by the state in the exercise of sovereign authority. Q: What is the true construction of the expression: Property which is for the time being in use or intended for use for commercial purposes?

33 3) Sovereign immunity as a defence b) To enforcement Alcom Ltd v Republic of Columbia [1984] AC 580 Asset was a debt representing the balance standing to the credit of a diplomatic mission in a current account used for meeting the day-to-day expenses of running the mission of a foreign state. Debt characterised as sovereign even though some of the money drawn upon would be used for commercial purposes. To fall within the commercial purposes exception a judgment creditor has to show that the credit balance in the bank account was specifically earmarked by the foreign state solely for being drawn upon to settle liabilities incurred in commercial transactions i.e. issuing documentary creditor in payment for the price of goods sold to the state. An asset has to be looked at as a whole. No suggestion by the HoL that the source of the asset is relevant to its use.

34 3) Sovereign immunity as a defence b) To enforcement Orascom Telecom Holding SAE v Republic of Chad & Ors [2008] EWHC 1841 Orascom applied for a third party debt order in respect of money held by Citibank for Chad, in order to enforce Orascom s unpaid ICC arbitration award against Chad. Orascom s case was that the arrangements under a World Bank revenue management programme required Chad s oil revenues to be paid first into a transit account at Citibank in London, to cover debts owed to World Bank by Chad. The remaining funds were then transferred to Chad s borrower account as part of escrow arrangements ( the Account ). Term of World Bank s revenue management programme that the revenues were transferred first to the Citibank account rather than direct to Chad so that the debts owed to World Bank were covered. Were the contents of the account at the time being in use or intended for use for commercial purposes?

35 3) Sovereign immunity as a defence b) To enforcement Orascom Telecom Holding SAE v Republic of Chad & Ors [2008] EWHC 1841 Judgment Section 13(5) Certificate was of no value. The Account was not immune from execution as it was property which for the time being was in use for commercial purposes. It had been established and operated for the purposes of a commercial transaction namely: to receive the proceeds of a contract for the supply of goods or services; and/or to be part of a system specifically established for the purposes of repayment of loans by the World Bank to Chad.

36 3) Sovereign immunity as a defence b) To enforcement SerVaas Inc v Rafidain Bank [2013] 1 AC 595 Primary consideration is the nature or character of the relevant activity what is actually being done with/ on the property in question. SerVaas obtained judgment against Iraq sought enforcement against significant sums held by the state-controlled bank on behalf of Iraq. The bank was due to pay these sums to Iraq pursuant to a restructuring of debts Iraq directed that they be paid to the Development Fund for Iraq. Section 13(5) Certificate served stating that the funds were not intended for or in use for commercial purposes.

37 3) Sovereign immunity as a defence b) To enforcement SerVaas Inc v Rafidain Bank [2013] 1 AC 595 The expression in use for commercial purposes should be given its ordinary and natural meaning having regard to its context. Wording of section 13(4) is narrower than other provisions in the 1978 Act which refer to proceedings relating to or in connection with a commercial transaction that Parliament chose not to use the same language shows that it intended a difference in meaning. Critical issue is the use to which the property in question is put. The nature or origin of the obligation which it is sought to enforce is irrelevant: E.g. The fact that the property arises from a commercial transaction does not inform the question whether that property was, at the relevant time, used for a commercial purpose.

38 3) Sovereign immunity as a defence b) To enforcement SerVaas Inc v Rafidain Bank [2013] 1 AC 595 Judgment of Supreme Court: Origin of debt irrelevant. Property not being used for any particular purpose whilst being held by the Bank. Intended use of property is sovereign. Property was immune from execution.

39 3) Sovereign immunity as a defence b) To enforcement L R Avionics Technologies Ltd v Federal Republic of Nigeria and another [2016] EWHC 1761 Claimant contracted with the Federal Republic of Nigeria ( the State ) for the supply of military equipment. Contract contained an arbitration clause seat in Nigeria. Claimant obtained an arbitral award against the State for $US 5 million ( the Award ). State owned property in London ( the Property ). Claimant sought permission to have Award recognised and enforced in UK and execution by way of charging order over the Property on grounds it was in use for commercial purposes.

40 3) Sovereign immunity as a defence b) To enforcement L R Avionics Technologies Ltd v Federal Republic of Nigeria and another [2016] EWHC 1761 State served section 13(5) certificate which certified that the property is part of the Nigeria High Commission of the Federal Republic of Nigeria in the United Kingdom and it is in use for Consular activities. Claimant argued Property was leased to OIS a specialist Nigerian visa and passport application agency at a commercial rate. OIS was State s agent carrying out various activities on behalf of the Nigerian High Commission on a commercial basis.

41 3) Sovereign immunity as a defence b) To enforcement L R Avionics Technologies Ltd v Federal Republic of Nigeria and another [2016] EWHC 1761 Judgment An application to enforce an arbitration award is a proceeding which related to the arbitration. BUT: whether Property is in use for commercial purposes has to be answered from the point of view of the State, not OIS implicit in section 13(5).

42 3) Sovereign immunity as a defence b) To enforcement L R Avionics Technologies Ltd v Federal Republic of Nigeria and another [2016] EWHC 1761 From OIS s point of view, no doubt Property in use for commercial purposes as OIS was carrying on a business with a view to profit of which the principal element consists of processing visa and passport applications on behalf of the Nigerian High Commission in exchange for payment typical commercial activity. But, if carried out by State using its own staff - consular activity. Outsourcing task to OIS does not alter fact that the nature or character of the relevant activity is the exercise of a public function. Property was immune from execution.

43 3) Sovereign immunity as a defence b) To enforcement Q: What is the test for determining whether an activity is commercial or in the exercise of sovereign authority? Egypt v Gamal-Eldin [1996] 2 All ER 237 the proper approach to the question whether an activity is commercial or in exercise of sovereign authority, involves looking at all the circumstances in relation to the activities and their context and then considering all the factors together. No one factor is in itself determinative in characterising the activity as sovereign or non-sovereign. It is relevant to look at the nature of the activity, the identity of those who deal with it, and the place where it takes place in order to resolve this question.

44 3) Sovereign immunity as a defence b) To enforcement Summary: The test of commercial purposes is very fact specific. In determining whether a contract or transaction is commercial in nature reference should be made primarily to the nature of the contract or transaction itself.

45 Conclusions Duty of arbitration tribunal to give an award which is enforceable. Commercial purposes exception is very limited. Policy of easy enforcement under the NYC is frustrated by difficulties in enforcing arbitral awards. If State is allowed to raise the defence of immunity at the execution stage the agreement to arbitrate is otiose and of no value.

46 What can be done? A party is entitled to expect the State to behave like any other commercial party when entering into a commercial contract Act permits a State to raise the sovereign immunity defence at the execution stage even in circumstances where there is a valid arbitration agreement and the State has submitted to the jurisdiction of the arbitration tribunal. When contracting with a state party ensure that the dispute resolution clause in the arbitration agreement includes: An express waiver of immunity from execution as well as an express waiver of immunity from jurisdiction.

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