Arbitration and state immunity: time for a reassessment?

• Published date: 27 September 2023
• Subject Matter: International Law, Litigation, Mediation & Arbitration, International Courts & Tribunals, Arbitration & Dispute Resolution
• Law Firm: Kennedys
• Author: Mr Alexander Scard

This article was co-authored by Natalia Hniezdilova, Litigation Assistant, London.

This article first appeared in The ICLG to: International Arbitration Laws and Regulations, which covers common issues in international arbitration laws and regulations - including arbitration agreements, governing legislation, choice of law rules, selection of arbitral tribunal, preliminary relief and interim measures - in 36 jurisdictions.

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Introduction

The issue of state immunity is attracting renewed interest. In the last year, courts in the US and UK have lifted stays of proceedings brought by Yukos shareholders to enforce against the Russian Federation arbitral awards of more than US$50 billion. Those courts will now address questions of state immunity.¹ This is against the background of Russia's invasion of Ukraine. Arbitration proceedings under the Russia-Ukraine Bilateral Investment Treaty² had already been brought in relation to Russia's seizure of Crimea in 2014. There are indications now of further arbitration claims in connection with losses sustained since the invasion.³ It is possible too that Western investors may seek to bring claims under investment treaties in respect of assets that have been subject to measures in Russia; with Russia, for its part, potentially claiming where its property has been sanctioned.

Trying to enforce an arbitral award against a state is difficult. Some award creditors try for many years to make recoveries against non-paying states.⁴ The challenges include identifying state assets in the first place. However, the principal obstacle is state immunity: demonstrating the commercial - as opposed to sovereign - use of the assets and persuading the local, enforcing court that state immunity does not apply. This chapter looks at these issues, as well as the connected problem of enforcement against state-owned entities (SOEs).

State immunity - overview

'State' or 'sovereign' immunity is based upon on the international law principle of the sovereign equality of states.⁵ According to this principle, no State can adjudicate over another because they are equals. If a state (the foreign state) is sued by a private person in the courts of another state (the forum state) then, should the foreign state be successful in its plea of state immunity, the forum state will dismiss the claim.

The state immunity which is the subject of the present chapter is to be distinguished from other forms of immunity, such as diplomatic immunity, and certain other doctrines such as the common law doctrines of act of state and non-justiciability.

The sources of state immunity are a mix of international and domestic law. On the international plane, state immunity is a rule of customary international law. It is not a mere expression of comity between nations but an obligation on the forum state to uphold a foreign state's claim to immunity.⁶ So each state stands potentially to be a beneficiary of the system, as well as being subject to an obligation to uphold it.

However, the detail of the application of state immunity in any particular situation (for example, the extent to which there are any exceptions) will likely depend on any treaties to which the relevant states may be parties and their own domestic laws on state immunity.

There are a number of international law instruments, including the European Convention on State Immunity 1972 (the ECSI).⁷ There is also the United Nations Convention on Jurisdictional Immunities of State and Their Property 2004 (the UNCSI) although this is not yet in force, as the necessary number of ratifications have not yet been received.⁸ Also of relevance are the International Law Commission Draft Articles on Jurisdictional Immunities of States and Their Property, with commentaries, 1991 (ILC Commentary),⁹ which led to the adoption of the text of the UNCSI. Whilst treaty coverage on the subject of state immunity is not presently very extensive, state immunity is recognised as a rule of customary international law and is therefore binding on states.

At the national level, some countries have their own bespoke domestic laws dealing with state immunity, significant examples being the United States' Foreign Sovereign Immunities Act 1976 (US FSIA) and the United Kingdom's State Immunity Act 1978 (UK SIA). However, other countries do not have their own domestic law of state immunity. In which case, the state's rules on immunity may be very limited and found in a single provision in a statute dealing with private international law or civil procedure. Or the national courts, in determining cases where the question of state immunity arises, may refer exclusively to customary international law (so far as it can be ascertained).

In the Jurisdictional Immunities Case, the International Court of Justice (ICJ) held that the law of state immunity is procedural in nature and is not concerned with whether the conduct of the defendant state in question was itself lawful or unlawful.¹⁰ Moreover, the question of immunity should be dealt with as a preliminary matter at an early stage of proceedings and before consideration of the merits.¹¹ If the forum court decides that the assertion of state immunity by the respondent state is made out, then the forum court should dismiss the claim. A forum court is obliged to raise the matter of state immunity of its own motion if it is clear that there may be an issue.¹²

The law of state immunity draws a general distinction between two basic situations where it may be invoked. First, where the foreign state as defendant says that it is immune from the jurisdiction of the forum state in matters of liability (known as 'jurisdiction' or 'adjudication immunity'). Secondly, where the foreign state says that its property is immune from enforcement (enforcement immunity). In addition to these two situations there are other scenarios where the court of the forum state's powers may be said to interfere with the sovereignty of the foreign state; for example, where interim measures of attachment are imposed as security for a claim. Accordingly, issues of state immunity can arise at different points in a dispute and the precise rules that apply at any particular stage may vary.¹³ By and large, the rules giving immunity from enforcement are even stronger than those providing a state with immunity from adjudication.¹⁴

Absolute v restrictive immunity and exceptions to immunity

Historically, there have been two principal theories of state immunity: absolute immunity and restrictive immunity. The theory of absolute state immunity is that, no matter in what capacity it is acting or the nature of its dealings, a sovereign state cannot be sued before the courts of another state unless it expressly consents.¹⁵ By contrast, the theory of restrictive immunity draws a distinction between different types of state activity: acts in the exercise of sovereign authority (acta jure imperii); and acts of a non-sovereign nature such as private and commercial activities (acta jure gestionis). The rationale is that, whilst a state may not be sued in exercises of its sovereign authority, in circumstances where the state is, in reality, acting like a private commercial party, it should not be able to hide behind the cloak of state immunity to avoid claims from counterparties.

Restrictive immunity is now the most widely accepted approach to be found in treaties such as the ECSI and UNCSI and in national legislation. Leaders in adopting the restrictive theory of immunity were Italy and Belgium towards the end of the 19th century.¹⁶ Other countries gradually followed suit: for example, the United States after the Second World War, and the UK in the 1970s. Some states such as the Soviet Union held on to the absolute approach for longer due to their political and economic systems. Subsequent Russian court practice and academic commentary showed, however, a growing tendency towards the restrictive approach and in 2015 a law was adopted which implemented a restrictive model.¹⁷ Ukraine's law on state immunity is still, formally speaking, an example of the absolute doctrine although some contemporary practice shows a restrictive...