Sovereign Immunity, the current state of play

Alex McCooke, LCC Manager, London, has written for Shipowners’ Club on the enforcement of the contractual obligations of state entities under UK law.

Cooke noted that many of the Club’s Members contract with sovereign states or state-owned entities. In doing so they might hear reference to the concept of ‘sovereign’ or ‘state immunity’, and fear that this could affect their ability to enforce their contractual rights.

McCooke has demystified this topic. He wrote that sovereign Immunity was a longstanding legal doctrine whereby states were held to be immune from civil or criminal proceedings. In many countries, this was initially a complete exemption from liability for national governments. However, over time the general practice that has developed in international law is that:

  • Most states now allow civil actions to be brought against them in their own courts,
  • But they expect immunity from suit in foreign courts, and
  • Grant foreign states immunity from suit in their courts.

In the UK, the Monarchy and Government traditionally enjoyed wide immunity from suit. The Crown Proceedings Act 1947 altered this position, allowing most forms of civil claims and certain criminal actions to be brought against the state.

In regard to foreign states, the UK originally subscribed to the absolute immunity rule. Other states outside of the UK developed a restrictive doctrine of immunity, whereby only governmental acts attracted immunity.

In 1972, many European countries signed the European Convention on State Immunity, which reflected a move to a restrictive form of sovereign immunity. The UK implemented its provisions through the State Immunity Act 1978. The immunity granted under the Act applies to sovereign states and any other entity when exercising sovereign authority on behalf of the sovereign state.

The State Immunity Act contains a general provision granting statutory immunity to sovereign governments and entities but then lists specific exceptions to that immunity.

Example: The NML Capital Case

In 2011 Argentina sought immunity when a commercial party tried to enforce a New York court judgment against their assets in the UK. They argued that the enforcement did not constitute proceedings relating to a commercial transaction, but instead an enforcement action linked to proceedings related to a commercial transaction’. The Supreme Court agreed with this narrow interpretation.

Example: The Pearl Petroleum Case

The claimants entered into an agreement with a state entity to produce gas in Kurdistan, Iraq. They commenced arbitration in England after payments from the state entity were not forthcoming. They obtained an interim order from the tribunal, requiring the defendants to pay them $100m within 30 days. Under the Arbitration Act, they then applied for a court order, demanding the defendants comply with the arbitral order. The state entity defended this application, arguing that oil and gas contracts are by their nature an exercise of ‘sovereign authority’ and should attract state immunity.

The High Court agreed that the contract constituted an exercise of sovereign authority, by awarding rights over oil and gas resources. However, as the defendants were not a sovereign state but a state entity, they were only afforded immunity when exercising the sovereign authority of the state itself (i.e. Iraq). They were not afforded immunity when exercising their own authority as a regional government. After reviewing the Iraqi Constitution, the Court concluded that it was the regional government’s authority which was being exercised by the entry into this contract. Accordingly, the state entity was found not to have immunity from suit in the UK on this occasion.

McCooke noted in conclusion that while the doctrine of sovereign immunity was not a thing of the past, its application had been narrowed significantly in most countries over the years.

He said that a Member wishing to bring a claim against a state or state entity in general would be required to do so in the courts of that state. However, if Members needed or wished to bring proceedings against such a party in other countries, they could do so where their claim fell into one of that country’s exceptions from immunity.

In the UK, so long as a claim relates to a commercial transaction and not some act of sovereign authority (such as being granted a central government license to drill for oil), sovereign immunity should not apply.