States are generally protected from court proceedings in other countries by virtue of state immunity. It reflects the understanding that one country cannot claim sovereignty over another.
State immunity is either absolute or restrictive. In the UK, a restrictive approach is taken under the State Immunity Act 1978 (the SIA). Pursuant to the SIA, a state is not immune from the jurisdiction of the courts if it has agreed in writing to submit a dispute to arbitration (among other exceptions).
In the context of arbitration, the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Convention) established the International Centre for the Settlement of Investment Disputes (ICSID). The ICSID provided for the conciliation or arbitration of legal disputes arising directly out of investments between a contracting state and a national of another contracting state.
In a recent hearing, the Court of Appeal dismissed appeals from Spain and Zimbabwe, ruling that neither states were entitled to use the SIA to challenge ICSID arbitration awards on the basis of state immunity.
Brief Summary of the Decision
The Court of Appeal’s decision is an important judgment in relation to the enforcement of arbitral awards. It heard two combined appeals together; Infrastructure Services Luxembourg S.À.R.L. v Kingdom of Spain and Border Timbers Limited v Republic of Zimbabwe. The judgment is here. The cases were heard together as they shared overlapping issues on significant points of law.
Both Zimbabwe and Spain sought to circumvent large arbitration awards (in the hundreds of millions), relying on state immunity to set aside the registration of the arbitration awards in the High Court.
The Court of Appeal judges pointed to Article 54 of the Convention, which stipulates that each contracting state shall recognise an ICSID award as binding and enforceable as if it were a final judgment of its domestic courts.
Overall, it confirmed that the ICSID agreement is to be viewed as “written agreement” by contracting states.
The Court of Appeal’s Reasoning
In delivering the leading judgment, Lord Justice Phillips said the reasoning followed three logical steps: (1) is there general immunity? (2) If so, is the section 2 exception in SIA engaged? (3) If not, does the section 9 exception in the SIA apply?
There is express statutory general immunity conferred by section 1(1) of the SIA. There was no reason why this general immunity would not arise in the case of registering an ICSID award against a contracting state. Accordingly, the first limb was satisfied.
The key question is whether one of the exceptions to such general immunity is engaged. If an exception applied, the appeal would fail.
Under section 2, there is an exception to general immunity whereby any state may waive its immunity by a “prior written agreement.” One position is that Article 54 could be read as prior written agreement. However, Spain and Zimbabwe contended that the wording of Article 54 was insufficient to satisfy the requirements of “a prior written agreement” for the purposes of section 2(2) of the SIA.
The Court of Appeal disagreed and said that Article 54 is sufficient to waive state immunity and submit to UK jurisdiction under the SIA.
What it Means for Commercial Parties
The judgment expands on a particularly technical point of public international law.
In general terms, the decision is good news for private investors that contract with state-owned entities. It confirms that parties looking to enforce ICSID awards in the UK will find a pro-enforcement stance from the courts in relation to investor-state awards. States cannot claim immunity to avoid the payment of an adverse arbitration award.
That said, there may be further case law on the point if the decision is appealed again to the UK Supreme Court. The Court of Appeal has also allowed Zimbabwe to remit its setting aside application with other “exceptional” non-immunity defences against enforcement.
