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The curious case of state immunity: how to avoid a Pyrrhic victory


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Summary: Article highlighting the difficulties in engaging the “commercial purposes” exception to state immunity and the practical consequences that this has for parties who are seeking to enforce and execute arbitral awards against a state or state entity.

It is well-known that problems frequently arise when a non-state winning party attempts to enforce and execute an arbitral award against a state or state entity.

Whilst state immunity is not expressly referred to in Article V of the New York Convention, it is often raised through the public policy exception in Article V(2)(b) of the Convention or as an argument under Article III of the Convention, which provides that contracting parties shall enforce arbitral awards in accordance with the rules of procedure of the territory where the award is relied on.

The principles of state immunity

State immunity derives from the theory of the sovereign equality of states, as a consequence of which one state has no right to judge the actions of another by the standards of its national law.

It operates on two levels:

(1) immunity from suit; and

(2) immunity from enforcement and execution.

Immunity from suit will prevent a court (or arbitral tribunal) from considering claims against that party. 

Immunity from execution and enforcement will prevent a national court from recognising a foreign judgment or arbitral award against the immune party and from making and executing orders against it.

It has to be said that the immunity from execution doctrine has undergone significant change and the law of some countries provides that in certain cases its application is restricted to the property used for performance of official functions of the state.  However, as practice indicates, even the limited version of this doctrine significantly restricts possibilities for enforcement proceedings.

As a result, states continue to rely on such immunity, with the consequence that a successful party may suffer what effectively is a Pyrrhic victory, unless assets owned by the state are not immune from execution.  The successful party therefore will have to identify state assets used for commercial purposes in order to execute the arbitral award or to face being unable to obtain any relief.        

In the UK, the statutory provisions regarding the immunity of states from execution are set out in the State Immunity Act 1978 (SIA).

Section 13(2)(b) of the SIA provides that property of the state shall not be subject to any process for the enforcement of an arbitration award. 

Section 13(4) of the SIA provides that section 13(2)(b) does not prevent the issue of any process in respect of property which is, for the time being, in use or intended for use for commercial purposes.  However, it is generally recognised that the “commercial purposes” exception does not apply to property used for diplomatic, military, cultural and scientific purposes or to property of a state’s central bank.

In addition, section 13(5) of the SIA provides that the head of a state’s diplomatic mission in the UK shall be deemed to have authority to give a certificate to the effect that any property is not in use or intended for use by or on behalf of the state for commercial purposes and that such a certificate shall be accepted as sufficient evidence of that fact unless the contrary is proved.

The application of the principles of state immunity

In AIG Capital Partners v The Republic of Kazakhstan, the English Commercial Court considered a claim for state immunity from enforcement by the Republic of Kazakhstan in relation to cash and securities held in London.

The Ambassador of the Republic of Kazakhstan certified that the assets held formed part of a National Fund designed to ensure the economic stability of Kazakhstan.  He also certified that the assets had never been used for commercial purposes and were not intended to be used for such purpose.

The Commercial Court upheld the claim for immunity as it accepted that the assets formed part of the Kazakh National Fund, which was created to assist in the management of the economy and government revenues of the Republic of Kazakhstan.  It was also accepted that  the management of a state’s economy and revenue constitutes a sovereign activity.

The recent case of L R Avionics Technologies Ltd v The Federal Republic of Nigeria is another example where execution of an award against state property was refused on the basis that it did not fall within the “commercial purposes” exception.

The Claimant obtained an arbitral award against the Federal Republic of Nigeria for breach of a contract for the supply of military equipment.  The claimant sought to enforce the award in England and obtained a charging order in respect of property in London owned by the Federal Republic of Nigeria, but leased to a privately owned company which provided visa and passport services on behalf of the Nigerian High Commission.

Nigeria applied to set the charging order aside on the basis that the property was immune from execution, as it was used for the provision of consular services. 

The court referred to the case of ServVaas Inc v Rafidain Bank, in which the Supreme Court held that the critical issue was the purpose to which the property in question was put from the point of view of the state, and the nature or character of the relevant activity.  It held that issuing passports and visas was not a commercial use of the property, even if those services had been outsourced to a private company in what appeared to be part of a commercial transaction. 

These cases can be contrasted with some of the more successful efforts of Franz Sedelmayer to enforce an arbitral award against the Russian Federation. 

After a number of unsuccessful enforcement attempts against various types of property (including Lufthansa Airlines’ payments to Russia for overflights of Russian airspace), Mr Sedelmayer identified an apartment complex in Cologne that had previously housed the Soviet Trade Ministry that was still registered in the name of the Russian Federation.  The Cologne Higher Regional Court ruled that the apartment complex owned by the Russian Federation should be sold for the benefit of Mr Sedelmayer, as it was no longer serving any sovereign function.


The recent case of L R Avionics Technologies Ltd highlights the difficulties in engaging the “commercial purposes” exception.  The English courts will focus on the nature and use of the nature and use of the state property, regardless of the fact that the property is being used by an agent on behalf of the state.   Parties wishing to maximise their protection against the defence of state immunity are best advised to include an express waiver of immunity clause, rather than relying on the commercial purposes exception.

This blog post first appeared on Practical Law Arbitration Blog on 5 September 2016.

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