The claim of state immunity and state-owned companies
This article covers the subject of state immunity in relation to state-owned companies in the light of the recent English case law. The article addresses the issues connected with the hybrid status of such companies and its implications. It also focuses on the reasoning behind a number of landmark court decisions in this area, including Taurus Petroleum Limited v. State Oil Marketing Company of the Ministry of Oil, Republic of Iraq and La Générale des Carrières et des Mines v F.G. Hemisphere Associates LLC and attempts to define the key factors which influence judicial decisions.
The issue of state immunity is of interest for all multinational corporations. It is of special interest for oil and other companies involved in development of natural resources beyond the borders of their home states. It is common practice for a host country to act through state-owned companies in transactions for development of natural resources. Such companies despite being separate legal entities often (if not always) act on direction of relevant ministries and other governmental agencies and as such from time to time face legal qualification as state extension. This reveals dual nature of such companies which deserves attention of legal practitioners due to uncertainty it also involves. As rightly put by C.M. Schmitthoff1, unexpected and irregular use of sovereign immunity poses more risk to traders than if it was a permanent feature of the legal status of a state or a state - owned enterprise. At least in the latter case, traders are not taken by surprise and adjust their practices accordingly.
The legal problems arising from dealing with state-owned companies are multi-faceted. In this article I would distinguish two general situations involving state-owned companies when a plea of immunity is usually made:
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A state-owned company is sued by a counterparty on various grounds related to a transaction between them or in any connection with it;
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A state-owned company is sued, or, in an action in rem, its property is attached, by an unrelated third party which, in contrast, was a party to a transaction with a state, a state organ or another state-owned company.
In each of those situations the issues of a state’s immunity from both suit and enforcement of a judgment or arbitration award may arise, however, raising the immunity from execution defence is more typical for the second situation. The issues will be further discussed by reference to the English case law which provides guidance on the latest developments in courts’ approaches to the status of state-owned companies. This is very helpful due to the following reasons:
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English law is often a governing law of the above-mentioned transactions;
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English courts or arbitration with a seat in the UK are the primary forum for disputes arising out of such transactions; and
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parties often seek enforcement of a judgment or an arbitration award in a jurisdiction where the English law applies.
Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq2 is a perfect example of the first situation. Briefly, Taurus Petroleum Limited (“Taurus”), a company which had previously successfully sued the Iraqi State Oil Marketing Company (“SOMO”) over some debts arising out of a series of contracts between them for sale of crude oil and LPG and which had been awarded $ 8,716,477 as a result, after that tried to enforce the judgment in the UK. For that particular reason Taurus obtained through the High Court of Justice third party debt orders against a SOMO’s debtor for purchased oil and its bank which issued the letters of credit of which SOMO was beneficiary. SOMO tried to set aside the third party debt orders on the grounds which included, inter alia, state immunity defence. SOMO’s argument was that based on the Iraqi law provision which stated that oil was a public asset and all proceeds from the sale of oil were at all times the property of the Government of Iraq. Therefore, SOMO argued, such property could not be attached. Further, in its submissions SOMO described itself as an „emanation of the Republic of Iraq.“ However, the High court ruled that it was not a public asset that was attached, but a SOMO’s interest in a different autonomous transaction governed by the other set of rules. In deciding on the issues of state immunity the High Court applied the State Immunity Act of 1978 which provided in s.14(2):
“A separate entity is immune from the jurisdiction of the courts of the United Kingdom if, and only if —
(a) the proceedings relate to anything done by it in the exercise of sovereign authority; and
(b) the circumstances are such that a State would have been so immune.”.
Thus, it was necessary to decide whether SOMO enjoyed a separate legal personality distinct from the Republic of Iraq or not. In analyzing the law of Iraq regarding the status of SOMO, the court used the following criteria:
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Effective separate existence of the entity;
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The extent of interference of the state with an entity;
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Nature of entity’s activities (sovereign or commercial).
After examining all underlying facts the court determined that the “required degree of separation” of SOMO from Iraq was presumed and was not rebutted by SOMO. Overall, due to the key findings that (1) the debts were not a public property and therefore could be attached; and (2) the beneficiary of the debts, SOMO, enjoyed a separate corporate status; and (3) selling oil and receiving proceeds of sale under letters of credit were ordinary commercial activities, the state immunity defense of SOMO failed. However, it is clear from the analysis that even if on the basis of all relevant documents and facts the court found SOMO as not distinct from the state of Iraq, it would not trigger automatic immunity from the claim. This draws on the theory of limited immunity where the acts jure gestionis, i.e. the acts relating to business activities as contrasted with exercise of governmental functions (or jure imperii) do not exempt states from liability and signals major shift from absolute immunity to restrictive principle of state immunity. In that regard, the state-owned entities may be said as having a “hybrid status“.
Surprisingly, the High Court set aside the third party debt orders, but not on the grounds of SOMO’s alleged immunity. It was because the High Court found that the debts had been owed also to the Central Bank of Iraq and therefore immune under the State Immunity Act of 1978 (the conclusion about the joint ownership was then upheld in appeal, but finally rejected by the Supreme Court which restored the third party debt orders).
La Générale des Carrières et des Mines v F.G. Hemisphere Associates LLC3 and SerVaas Inc. v. Rafidain Bank4 are both perfect examples of the second situation. In the first case the claimant purchased awards against the Democratic Republic of Congo and sought to enforce them against the assets of a state-owned company (“Gécamines”). The courts of two instances equated the state and the state-owned company making the latter liable for the debts of the former regardless of the company’s separate legal existence. In doing so, the courts, it can be said, lifted the corporate veil, though all previous case law did so only in rare cases involving wrongdoing and impropriety. It was not the case in Gécamines. The company’s existence separate from the state was evidenced by its own budget, assets and tax liabilities. In all major respects the state respected such separate existence. The Judicial Committee of the Privy Council (often referred to as the “Board“) found the state control irrelevant for the purposes of equating the state and a state – owned company. This was in contrast to the previous common law test established by Trendtex Trading Corp v Central Bank of Nigeria5 relied upon by the Royal Court of Jersey and the Jersey Court of Appeal. Pursuant to that test, both elements (i) the governmental control and (ii) performing the governmental function were required for such equation.
This is also in contrast to the Bancec case6 in the United States where the Supreme Court disregarded a separate legal entity due to (i) extensive owner’s control whereby „a relationship of principal and agent is created“ and (ii) the resulted injustice is contrary to equitable principle. Instead, the Board formulated a “precondition“ for a state-owned company’s liability for debts of its founding state: de jure and de facto assimilation of property and activities of the company to that state. In the Board’s opinion, the lower courts’ conclusions about the “exceptional degree of power accorded to the state over the affairs of Gécamines’’ based on the Gécamines consitution and the relevant legislation was not sufficient to suggest the assimilation. The right of removal of the company’s board members by the head of state as well as the supervising ministry’s right of veto over almost all company’s transactions exceeding a very low threshold, though inconsistent with the principle of company’s independence from the state, did not undermine the separate existence of it. Thus, following Gécamines case, the presumption is that a state and a state-owned company do not bear each other’s responsibilities. This distinction is based on the above-mentioned State Immunity Act of 1978 which was intended to provide for the effect of judgments given against the United Kingdom in the courts of states parties to the European Convention on State Immunity7. Article 27 of the Convention excluded from the expression “Contracting State” a distinct legal entity providing, however, that the acts in the exercise of sovereign authority (acta jure imperii) make them immune from jurisdiction, except for the cases where a Contracting State in such circustances would not be so immune. Therefore, it seems that if Gécamines were finally equated with the state, i.e. recognized as the organ of the state, and found liable for the debts of the latter, there would still be room for debate on the issues of the state immunity privilege given a major shift in international law from absolute immunity doctrine to restrictive one.
In SerVaas Inc. v. Rafidain Bank the Supreme Court dismissed the appeal of SerVaas Inc., a company which had obtained a judgement of the Paris Commercial Court against the Iraqi Ministry of Industry back in 1991 for the equipment supplied in 1988. After having registered the judgment in England and Wales, in 2010 SerVaas Inc. applied for a third party debt order against the monies payable from the Iraqi state-controlled Rafidain Bank to Iraq according to a certain scheme of distribution of the Rafidain’s London branch assets. In 1991 Rafidain’s London branch was placed in liquidation on petition from the Bank of England. By 2009 Iraq purchased the Rafidain’s commercial debts.
The case did not entertain any issues concerning the status of Rafidain Bank and its immunity from jurisdiction. Instead, the dispute was about immunity from enforcement based on s.13(2)(b) and (4) of the State Immunity Act of 1978 which did not prevent enforcement against the state property being in use or intended for use for commercial purposes. SerVass Inc. argued that the nature of transactions which gave rise to bank’s liability was entirely commercial. However, the Supreme Court held that the nature of underlying transactions was not relevant. Only current use of the property or intention to use it in commercial purposes will not prevent the issue of a process in respect of the property. The head of the Iraq’s diplomatic mission in the UK Iraq produced a document certifying that the property was not in use or intended for use for commercial purposes. By virtue of s.13(5) of the State Immunity Act of 1978 the burden was on SerVass to prove the contrary.
The following conclusions may be drawn from the above analysis. Firstly, state and state-owned companies are treated separately by English law and as a rule they are not responsible for debts of each other. Secondly, even if not recognized as part of the state, state-owned companies may still enjoy state immunity privilege in respect of the acts which relate to the exercise of a sovereign function. Thirdly, recognition of a state-owned company as organ of the state would not result in granting automatic state immunity. Fourthly, the control (both constitutional and factual) from the state per se is a common feature of a modern state-owned company and will alone not be sufficient to equiate it with a state. In brief, it is worth mentioning that today the generally accepted legal practice recognized by international conventions, legislation and case law is that while states are exempted from state immunity privileges in relation to their commercial activities, state-owned companies are granted such privilege when it comes to exercise of sovereign functions.8 It is also important to distinguish between an organ of the state which may be a separate legal entity (i.e. having separate legal personality) capable of suing or being sued (e.g. central banks) and state-owned entity distinct from the executive organs of the government.
Konstantin O. Galenskiy
Attorney for Gazprom Neft Badra B.V., Iraq
1 Schmitthoff, C.M. (1958) The claim of sovereign immunity in the law of international trade. The International and Comparative Law Quarterly Vol. 7, No. 3. pp. 452-467
2 Taurus Petroleum Limited v. State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2015]. Retrieved April 02, 2019 from https://www.supremecourt.uk/cases/uksc-2015-0199.html
3 La Générale des Carrières et des Mines v. F.G. Hemisphere Associates LLC [2012] Retrieved April 02, 2019 from https://www.jcpc.uk/cases/docs/jcpc-2011-0061-judgment.pdf
4 SerVaas Incorporated v Rafidain Bank and others [2012] Retreived April 02, 2019 from https://www.supremecourt.uk/cases/docs/uksc-2011-0247-judgment.pdf
5 [1977] 2 WLR 356, 64 ILR 111
6 FNC Bank v. Banco Para el Comercio [1983]. Retrieved October 12,2017 from https://supreme.justia.com/cases/federal/us/462/611/case.html
7 European Convention on State Immunity signed in Basel on May 16, 1972. Retrieved April 02, 2019 from https://www.coe.int/en/web/conventions/full-list/-/conventions/rms/09000016800730b1
8 Kuwait Airways Corp v Iraqi Airways Co [1995] 1 WLR 1147, 1158E-1160F.