Introduction
As the global landscape evolves and international trade flourishes, arbitration has emerged as a preferred mechanism for resolving international commercial disputes, providing parties a neutral forum and a streamlined process. Some international economic activities engage active participation of sovereign States in partnership with private investors. In some economic arrangements, sovereign states offer consent to arbitration in their contract/agreement with an entity as a means of resolving disputes that may arise therefrom.[1] The enforcement of arbitral awards, both domestic and foreign, is crucial to maintaining the credibility and effectiveness of the arbitral system. Yet, when it comes to enforcement of foreign arbitral awards against sovereign states, challenges may arise due to the concept of sovereign immunity.[2] Sovereign immunity is a fetter to consent for enforcement proceedings of an arbitral award. If the coercive instrument of a foreign court cannot be invoked against a State party in the enforcement of an award, it does suggest that the party has not freely given consent to the processes leading to the award. It is an albatross to parties’ consent inherent in arbitration and the resultant award.
This article aims to provide an assessment of the defence of sovereign immunity in the enforcement of foreign arbitral awards. By analyzing the legal principles and contemporary challenges, it seeks to contribute to the ongoing dialogue surrounding the balance between state immunity and the enforcement of arbitral awards, ultimately shedding light on potential avenues for harmonizing the interests of both sovereign states and private entities in the realm of international arbitration.
Foreign Arbitral Awards And Enforcement
For there to be an arbitral award, there has to be an arbitration agreement or an underlying contract (agreement) that has an arbitration clause executed by parties (individuals, corporate entities or states/countries) capable of being enforced. An arbitration agreement is a contract between two or more parties to submit their disputes to arbitration rather than to litigation in a court. It is pertinent to note that the arbitration agreement invokes the principle of consent, often on the basis of an existence of an arbitration clause in the base contract, to submit to the jurisdiction of an arbitral tribunal, either domestic or international.
Foreign arbitral awards refer to the decision of arbitration conducted by an arbitral tribunal seated in a country other than the one where the award is sought to be enforced. Overall, foreign arbitral awards are an important mechanism for resolving international disputes. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), which is a treaty that has been ratified by over 160 countries, has played a key role in facilitating their enforcement across national borders. The US Foreign Sovereign Immunities Act (“FSIA”), the UK State Immunity Act 1978, the International Centre for Settlement of Investment Disputes (“ICSID”), etc are some of the relevant instruments in the enforcement of foreign arbitral award.
Enforcement
Enforcing foreign arbitral awards has proven to be a challenging issue compared to enforcing awards in other transnational disputes involving private parties. These difficulties arise due to the involvement of a sovereign party in the dispute, which immediately gives rise to complex issues surrounding sovereign immunity. This factor of sovereign immunity holds significant relevance when it comes to enforcing arbitral awards against States or State entities[3].
In pursuing enforcement, some States have pulled the strings of applying the defence of sovereign immunity which is also called state immunity which is a principle of international law that affords protection to a sovereign State, such as the Nigerian State, from lawsuits including, in some cases, enforcement proceedings. It also suggests that one sovereign State cannot be sued before the courts of another sovereign State without its consent. For clarity, when sovereign immunity is pleaded against the enforcement of an arbitral award against a foreign state or a state entity, the plea simply seeks to avoid the enforcement of the award against the state by requiring the court to withhold its jurisdiction on the basis that principles of comity require that it should not assume jurisdiction over the foreign state[4] and one of such scenario where the plea was made by a state is in the celebrated case of Process & Industrial Developments Ltd (P&ID) v. Federal Republic of Nigeria (FRN)[5].
Moreover, sovereign immunity, in this case, relates to the challenge of enforcement of an arbitral award, as against jurisdiction to determine a dispute. Here, the dispute has already been determined and parties are at the stage of enforcement of the award. Such enforcement must be sought through national courts and to enforce a foreign arbitral award, the party seeking enforcement must typically file an application with the competent court in the jurisdiction where enforcement is sought (oftentimes countries where the assets of the award debtor are found). The court will then review the application and may request additional information before rendering a decision on the enforcement of the award.
Applicability of Sovereign Immunity in the Enforcement of Foreign Arbitral Awards
This doctrine has been widely applied in international law to protect states but, the question of whether sovereign immunity should be extended to the enforcement of foreign arbitral awards has been a subject of debate among scholars recently. On one hand, proponents of sovereign immunity argue that a state should not be forced to submit to the enforcement of a foreign arbitral award because it would violate its sovereignty. They argue that a state should only be held accountable for its actions through its own domestic courts, and not through foreign courts or tribunals. On the other hand, opponents of sovereign immunity argue that the enforcement of foreign arbitral awards is necessary for the development of international trade and commerce. They argue that the principle of sovereign immunity should not be used to shield a state from its contractual obligations, especially when it has voluntarily agreed to arbitrate disputes with private parties.
In recent years, there has been a trend toward limiting the scope of sovereign immunity in the enforcement of foreign arbitral awards. This trend is reflected in the New York Convention. Despite its brevity, the Convention is now widely regarded as “the cornerstone of current international commercial arbitration”.[6] Article V of the New York Convention provides a framework and requires signatory states to enforce foreign arbitral awards, subject to certain limited grounds for refusal. These grounds include public policy which shall be our focus here. Making a useful detour to the Nigerian legal system, in Okonkwo v. Okagbue[7], the Supreme Court defined public policy as the ideals which for the time being prevail in a community as to the conditions necessary to ensure its welfare, so that anything is treated as against public policy if it is generally regarded as injurious to the public interest. Public policy holds that no subject can lawfully do that which tends to be injurious to the public, or against public good, which may be termed, as it sometimes has been, the policy of the law, or policy in relation to the administration of the law.[8]
Using Nigeria as a case study in respect of the applicability of public policy, it is the law[9] that before a party, as judgement creditor, can attach any judgment debt against the Federation funds, the consent of the Attorney General must first be sought and obtained. Failure to obtain such consent may result in the legal proceedings being struck out or dismissed. The purpose and essence of the provision of the law was in Onjewu v Kogi State Ministry of Commerce and Industries[10], where the Court of Appeal enunciated on pages 88-89 thus:
“… the rationale for the provision in Section 84(1) of the Sheriffs and Civil Process Act for the previous consent of the Attorney General before a Court could validly issue even an order garnishee nisi against the funds in the hands of a Public Officer is to ensure that moneys that have been voted by the House of Assembly of a State for a specific purpose in the appropriation Bill presented to that House and approved in the budget for the year of appropriation does not end up being the subject of execution for other unapproved purposes under the Sheriffs and Civil Process Law.”
The Court above continued that “it is a provision to ensure sound public administration. It is a matter of good public policy aimed at protecting public funds. It makes good sense too.”[11] The Supreme Court affirmed this position in the case of Central Bank of Nigeria Vs Interstella Communications Ltd[12], per Ogunbiyi, JSC (as he then was), thus:
“It should be noted clearly that the principle underlying securing the AGF’s consent as prescribed in Section 84 SCPA is to avoid embarrassment on him of not having the prior knowledge that funds earmarked for some purposes have been diverted in satisfaction of a judgment debt, which the government may not know anything about.” Thus, the purpose of Section 84 of the Sheriffs and Civil Process Act, as deciphered by the Courts, is the protection of public funds from indiscriminate use to settle judgment debts.”
It is therefore important for individuals and entities seeking to bring enforcement proceedings against the Government of Nigeria to be aware of the requirements of Section 84 of the SCPA and to obtain the necessary consent from the relevant Attorney General before proceeding with the action.
Likewise, in France and Italy, their courts have also taken a similar view on public policy as it deals with their resources. There is a greater readiness to withhold enforcement where the award involved a dispute concerning natural resources. In BP Exploration Company Ltd. v. Astor Protector Naviera SA[13], an Italian court held that courts will be sympathetic to the idea that the taking over of property is an act of public policy as Italian law recognizes the public ownership of natural resources.[14]
In addition, while the doctrine of sovereign immunity has traditionally been used to protect States from the jurisdiction of foreign courts or tribunals, the trend toward limiting its scope in the enforcement of foreign arbitral awards reflects the growing importance of international trade and commerce. Ultimately, the decision of whether to extend sovereign immunity to the enforcement of foreign arbitral awards will depend on the specific circumstances of each case and the applicable legal framework. One example where the defence of sovereign immunity to enforcement of a foreign arbitral award was successfully upheld is in the case of Islamic Republic of Pakistan v. Broadsheet LLC[15]. The decision of the English Court, in this case, highlights the importance of carefully drafting arbitration agreements with foreign States and underscores the challenges faced by parties seeking to enforce arbitral awards against foreign States, particularly in cases where sovereign immunity is invoked as a defence.
Attachment of Properties For The Enforcement of Foreign Arbitral Award
Against a sovereign State, enforcement of foreign arbitral award either necessarily commences with or culminates in attachment of property or assets belonging to the State. Furthermore, the said enforcement trend is subjective to the type of property owned by the sovereign state that the judgement creditor seeks to attach in satisfaction of the judgement debt. The state can have either commercial property or sovereign property. Enforcement against commercial properties and sovereign properties involves different legal considerations due to the distinct nature and status of these assets.
Commercial properties are assets owned by a State or its entity engaged in commercial or economic activities and these assets may include real estate, bank accounts, business interests, shares in companies, and other tangible or intangible assets used for commercial purposes. When enforcing an arbitral award against commercial properties, the process is similar to enforcing a court judgment against a private party. The winning party can seek enforcement through domestic courts, which can issue orders for asset seizure, sale, or any other measures allowed by the domestic law of the enforcing State. The enforcement process can still be challenging if the State or entity resists compliance with the award. Attachment of commercial properties does not present any challenge during enforcement process. Such properties are referred to as proceeds of act jure gestionis (activities of commercial nature) and do not enjoy the protection of sovereign immunity.
However, sovereign properties encompass assets that have a special status due to their association with the State and its core governmental functions. These include assets in ‘Custodia Legis’ (property in Custody of the Law i.e. under the protection and control of the domestic court system), diplomatic properties, military hardware, and funds in the central (treasury) banks. They are described as acta jure imperii (acts by right of dominion) and enjoy special legal protection, making enforcement against them challenging as they require navigating complex legal issues related to sovereign immunity, national security, and international law. Under Section 1611 of the US Foreign Sovereign Immunities Act (“FSIA”), the property of a foreign central bank or the properties used for the military are immune from attachment and execution. See also Section 14(4) of the UK State Immunity Act 1978.
Acts of State and Acts of Commercial Nature
In the intricate realm of enforcing foreign arbitral awards, two distinct categories hold significant weight – acts of state and acts of commercial nature. These categories become paramount when dealing with sovereign entities. Understanding the nuanced differences between these concepts is crucial for those seeking to enforce foreign arbitral awards against states or their entities.
The concept of acts of state (Act of State doctrine) encompasses actions taken by a state or its authorities in the exercise of its sovereign powers and functions. These actions may include legislative, executive, or judicial decisions that have significant implications for the state’s internal or external affairs. One of the main characteristics of acts of state is their non-justiciability in foreign courts.[16] Like an ancient shield, acts of state are shielded from the prying eyes of foreign courts. The path to enforcing arbitral awards involving acts of state is treacherous. The sanctity of national sovereignty demands utmost respect, rendering foreign courts hesitant to meddle in the affairs of another realm. Thus, the enforcement of such awards may dance precariously on the razor’s edge. Wolters Kluwer in their publication “The Settlement of Foreign Investment Disputes” at page 14[17], stretched the doctrine of acts of state when they stated that, the conduct of foreign policy is not the matter for the courts but of the executive and the courts should not assume this role by speaking about the legality of the conduct of a foreign government. Also, that the organisation of States in the international community as equal sovereign States also requires that a domestic court should not upset this horizontal order by supplanting it with a vertical order in which courts of some powerful countries are able to judge the legality or otherwise of the acts of less powerful states.
In Liberian Eastern Timber Corporation v. Republic of Liberia[18], the court held that the act of State doctrine precluded it from enforcing the award of an ICSID tribunal. The focal point of the court’s decision was the act’s association with a concession pertaining to the State’s natural resources, leading to its unequivocal classification as an act of State. The analysis made in this case has been applied to the awards of other tribunals. In LIAMCO v. Socialist People’s Libyan Arab Jamahiriya[19], the arbitral award, rendered by an ad hoc tribunal, raised the crucial question of its enforceability under the New York Convention on the Enforcement of Foreign Arbitral Awards. The court determined that the dispute’s subject matter, concerning the act of nationalization, involved a political act beyond the realm of arbitrability. The court relied on the case of Underhill v. Hernandez[20], that courts have consistently found a foreign state’s act of nationalisation to be the classic example of a foreign act of state.
On the other hand, amidst the sovereignty panorama lies a realm of commerce, where states and their entities venture as shrewd merchants in the bustling marketplace. Behold the acts of commercial nature, where the lines blur between State and private actors! Put simply, acts of a commercial nature pertain to activities[21] undertaken by a State or its entities in a purely commercial or economic capacity, resembling those of private entities. Arbitral awards dealing with acts of a commercial nature are generally enforceable against a State or its entities, as they are considered similar to actions taken by private actors. Such awards are often treated like prized gems in the treasure chest of commerce. Foreign courts, recognizing the resemblance to private transactions, become more welcoming in their halls of justice. To them, such awards resemble familiar commercial obligations, ripe for enforcement like any other. For instance, Section 3 (1) of the UK’s State Immunity Act 1978 is instructive and provides thus:
“(1) A State is not immune as respects proceedings relating to—
(a) a commercial transaction entered into by the State; or
(b) an obligation of the State which by virtue of a contract (whether a commercial transaction
or not) falls to be performed wholly or partly in the United Kingdom.”
The above provision is a clear example of how commercial transactions entered into by a State is exempted from the application of the principle of sovereign immunity. The classical exposition of this exemption was upheld by Lord Denning in the case of Trendtex Trading Corporation v. Central Bank of Nigeria[22] where Lord Denning M.R. while relying heavily on his judgment in Thai-Europe Tapioca Service Ltd. V. Government of Pakistan Directorate of Agricultural Supplies [1975] 1 W.L.R. 1485 enunciated without ambiguity that:
“a foreign sovereign has no immunity when it enters into a commercial transaction with a trader here and a dispute arises which is properly within the territorial jurisdiction of our courts … if a government department goes into the marketplaces of the world and buys boots or cement – as a commercial transaction – that government department should be subject to all the rules of the market place.”
However, the application of acts of state doctrine and acts of commercial nature varies across jurisdictions and is subject to the relevant national laws and international treaties. The dividing line between the two acts is oftentimes nebulous and subject of contentious debate. What appears to be commercial on the surface might bear the subtle imprints of sovereign undertones. Moreover, enforcement may also depend on the existence of any specific waivers of immunity or agreements to arbitrate commercial disputes that the state has entered into. The concept of waiver may serve as an exception to the principle of sovereign immunity and this shall be discussed below.
The Concept of Waiver Of Sovereign Immunity
There are some exceptions to the rule or principle of sovereign immunity and one of which is where a sovereign State waives its immunity in relation to arbitral proceedings and the enforcement of arbitral awards under a legal instrument such as an arbitration agreement. It is without a doubt that a State can waive its sovereign immunity but this exception can only be considered when the State is a Defendant in the suit and not when itself brings an action and by implication intends to claim immunity from a counterclaim directly related to the principal claim[23]. The concept of waiver of sovereign immunity against enforcement of foreign arbitral awards refers to the intentional relinquishment or abandonment of a state’s immunity from legal proceedings or enforcement actions in connection with an arbitral award.
The waiver can be either express or implied. An express waiver occurs when the State explicitly agrees to arbitration or the enforcement of an arbitral award. Implied waiver, on the other hand, may be inferred from the State’s conduct, such as actively participating in the arbitration proceedings without raising objections to jurisdiction nor asserting immunity during enforcement proceedings. As regards immunity from jurisdiction, an arbitration clause in a State contract or agreement to arbitrate, in most cases, constitutes a waiver of sovereign State immunity. See Section 9 (1) of the UK State Immunity Act and Section 1605(a) of the FSIA.
It is worth noting that a waiver to sovereign immunity in respect of jurisdiction does not affect the defence to sovereign immunity to enforcement and execution but there are occasions where both can be waived. For the latter to be validly waived, it must be clearly expressed for it to be enforceable. Clause 15 of ICSID’s Model Clauses 1993 is instructive: “The Host State hereby waives any right of sovereign immunity as to it and its property in respect of the enforcement and execution of any award rendered by an Arbitral Tribunal constituted pursuant to this agreement.” Instructively, the US Supreme Court in Argentine Republic v. Amerada Shipping Corp.[24] held that signing an arbitration agreement cannot amount to an implied waiver of immunity over the execution of awards and judgments.
Therefore, we posit that a sovereign State exists both as a ‘political entity’ and as a ‘legal person in the limited sense of the private law’ and thus exercises a twofold function or has a dual personality. Therefore, it might be right (although subject to judicial decisions) for a foreign State, acting as a private person, to be sued for disputes arising out of commercial contracts or transactions for the purpose of upholding the terms of the contract without complying with the principle of sovereign immunity. It has become the practice that where the State participates in an activity that is irreconcilable with the Superior authority of the State, it must be shown that the State complied with the rules governing the activity otherwise it would be risking losing its immunity and thereby be impleaded[25]. Therefore, it is crucial for States to carefully consider the legal implications of their actions when engaging in commercial activities or entering contracts with private parties. By complying with the rules governing these activities and fulfilling their contractual obligations, States can help protect their sovereign immunity and avoid potential legal liability in the event of a dispute.
CONCLUSION
The defence of sovereign immunity to the enforcement of arbitral awards remains a complex and contentious issue in international arbitration. In the current landscape, where States and State-owned entities ardently resist enforcement proceedings, it becomes imperative to adopt a proactive stance from the very outset. A robust and explicit waiver of immunity from jurisdiction and enforcement must be sought and drafted with utmost specificity. Securing a comprehensive and unambiguous waiver shines as a beacon of protection. By fortifying agreements with express waivers, parties can pave the way for smoother dispute resolution, shielded from the perilous complexities of sovereign immunity. Moreover, the waiver should be tailored to apply to non-commercial assets of the State party.
For companies embarking on cross-border ventures or engaging with States or State-owned entities, a profound consideration needs to be given to due diligence on jurisdictions where a State party will likely have assets prior to executing investment agreement with the State, just to ensure that the jurisdictions are not pro-State immunity defence against enforcement of an award. By addressing this issue head-on, they can navigate the potential limitations to protection and relief that could otherwise be available to the State.
Also, in this realm of international transactions, where the balance of power may sway unpredictably, it is imperative to obtain pre-enforcement attachment orders against assets of the State party. This has the potential of compelling settlement negotiations on satisfaction of the award.
Foonotes
[1] Consent to arbitration presupposes that parties will be bound by the arbitral award and this also implies that parties have given their consent to finality of the award and freedom of enforcement. After all, what is the benefit of consent to arbitration if the resulting award cannot be enforced against the adjudged wrong doer (award debtor)?
[2] The principle of sovereign immunity has long been regarded as a fundamental tenet of international law, ensuring that states are immune from the jurisdiction of foreign courts and shielded from legal proceedings initiated by private entities.
[3] Chapter 9 – The Award and its Enforcement’, in Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes, (© Kluwer Law International; Kluwer Law International 2000) Page 5
[4] Ibid, P. 292.
[5] [2019] EWHC 2241 (Comm)
[6] A. van den Berg, The New York Arbitration Convention of 1958 1 (1981). A. Redfern & M. Hunter (eds.), Law and Practice of International Commercial Arbitration 3‑04 (4th ed. 2004) (“most important convention in the field of international commercial arbitration”)
[7] (1994) 9 NWLR PT. 368 PG. 301
[8] Per OGUNWUMIJU, JCA (Pp. 54-55, paras. D-A), Statoil Nig. Ltd v.. Inducon (Nig.) Ltd. & Anor (2012) LPELR-7955(CA)
[9] Section 84 of the Sheriffs and Civil Process Act (“SCPA”), Chapter 407, Laws of the Federation of Nigeria, 1990
[10] (2003) 10 NWLR (Pt 827) 40
[11] This position on the essence and purpose of Section 84 of SCPA was reiterated by the Court in Government of Akwa Ibom State Vs Powercom (Nig) Ltd (2004) 6 NWLR (Pt 868) 202, Ode Vs Attorney General, Benue State (2011) LPELR 4774(CA), Central Bank of Nigeria v. Okefe (2015) LPELR 24825(CA), University of Calabar Teaching Hospital Vs Lizikon Nigeria Ltd (2017) LPELR 42339(CA), Central Bank of Nigeria v. Ainamo (2019) 7 NWLR (Pt 1672) 407.
[12] (2017) 12 SC (PT IV) 97 AT PAGE 176
[13] (1974) 13 ILM 106
[14] Ibid 1, P 309
[15] [2018] EWHC 932 (Comm)
[16] This means that foreign courts typically refrain from examining the legality or appropriateness of such acts since they involve issues of national sovereignty and international relations. Arbitral awards seeking enforcement against acts of state may face challenges since foreign courts generally defer to the principle of non-justiciability and are reluctant to interfere with the sovereign acts of another state.
[17] Chapter 9 – The Award and its Enforcement’, in Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes, (© Kluwer Law International; Kluwer Law International 2000) pp. 279 – 313
[18] ICSID Case No. ARB/83/2
[19] 482 F. Supp. 1175 (D.D.C. 1980)
[20] 168 U.S. 250 (1897)
[21] These activities involve transactions, contracts, investments, and other commercial dealings.
[22] [1977] 2 W.L.R. 356
[23] State Immunity in International Law> The history of State immunity, Published online by Cambridge University Press: 05 October 2012
[24] 488 U.S. 428 (1989)
[25] See Oluwalogbon & Ors v. The Government Of United Kingdom & Anor (2005) LPELR-11319(CA) (Pp. 31-36 paras. A-A), Duke of Brunswick v. King of Hanover (1844) 6 BEAV 1; Wadsworth v. Queen of Spain (1851) 17 QBD 171; Lariviere v. Morgan (1872) 7 Ch 550 and Gladstone v. Masuru Bey (1862) 1 Hem & M 495.