Case Comment: NML Capital Limited v Republic of Argentina  UKSC 31
22 Friday Jul 2011
The Argentinian debt crisis of 2001 – 2003, and subsequent restructurings, have kept commercial lawyers busy all over the globe as investors have sought to recoup as much of their investments into the country as possible. In NML Capital v Argentina, the question for the Supreme Court was whether one such investor, a New York fund that bought into Argentinian bonds which were subsequently defaulted, could enforce its judgment against assets of the Argentinian state in the United Kingdom.
Allowing NML Capital’s appeal, the Supreme Court (Lords Phillips, Clarke, Mance, Collins and Walker) held that it was entitled to do so. The case pitted two titans of Brick Court chambers, Jonathan Sumption QC (in one of his last appearances before he joins the UKSC bench later this year) and Mark Howard QC against each other, and raised some interesting questions of international jurisdiction, and in particular the extent to which foreign states will be granted immunity under English law.
The facts of the case were relatively straightforward and are set out in our case preview back in March. NML is a “vulture” fund which invested in Argentinian bonds at substantially discount prices between 2001 and 2003, taking advantage of the country’s urgent need for financing at the time. NML subsequently called events of default when Argentina failed to meet its bill for interest. The bonds were subject to New York law, and NML obtained judgment before a New York court for $284m in 2006. It then sought to serve enforce against Argentina in the UK under common law (since no reciprocal enforcement legislation applies between the UK and the USA), and in 2008 was granted permission by the High Court to serve these proceedings out of the jurisdiction under CPR 6.20(9).
Argentina applied to set aside this order, arguing that as a sovereign state, it was immune from suit under section 1 of the State Immunity Act 1978, which grants a general immunity to states unless specific exceptions apply. The Court of Appeal (Aikens, Mummery and Elias LJJ) upheld this argument in February 2010. NML subsequently instructed Mr Sumption, and ran three principal arguments in reply, which formed the principal issues to be determined by the Supreme Court:
1. One of the exceptions under SIA 78 is section 3(1)(a), which provides that sovereign states are not immune “as respects proceedings relating to a commercial transaction entered into by the State“.
2. Section 31 of the Civil Judgments and Jurisdiction Act 1982 provides a further exception, namely that foreign judgments against a sovereign state would be enforceable through the English courts if two conditions were met: (a) the state in question would not have been immune if English laws were applied (i.e. the SIA 78), and (b) the judgment would otherwise satisfy the criteria for enforceability under English law.
3. Under the terms of the bonds themselves, Argentina had waived immunity and submitted to jurisdiction of national courts for the purposes of enforcement.
Until the late 1970s, sovereign states enjoyed absolute immunity from suit under English law, unless of course they voluntarily submitted to proceedings. However, from the late 1950s onwards the Court of Appeal under Lord Denning began to develop a more restrictive doctrine, under which states were immune in the exercise of their sovereign authority (acta jure imperii), but were not immune in the exercise of commercial activities (acta jure gestionis). The restrictive doctrine was then embodied into statute by s.3(1)(a) SIA 78, following ratification by the UK of the European Convention on State Immunity (ECSI).
Nevertheless, as to whether NML’s attempts to enforce were “proceedings relating to a commercial transaction” within the meaning of that section, the Court were split 3-2 against NML. There was no dispute that the bonds between NML and Argentina constituted a commercial transaction, and no dispute that the NML’s action in New York was proceedings relating to a commercial transaction. The issue was whether the UK proceedings, for the enforcement of a foreign judgment, could also be said to be relating to a commercial transaction. Lords Phillips and Clarke felt they could, and that a broad and progressive interpretation should be applied to strip states of immunity for executory as well as adjudicatory proceedings. Lords Mance, Collins and Walker preferred narrow interpretations, based on the intention of Parliament at the time and common practice at the time in the international loan and bond markets.
However, the distinction was a semantic one for the purposes of this case, since all the Justices agreed that s.31 CJJA 82 did provide NML with an alternative route it could rely on to lift Argentina’s state immunity. Lord Phillips gave the following neat summary of the effect of s.31:
“State immunity cannot be raised as a bar to the recognition and enforcement of a foreign judgment if, under the principles of international law recognised in this jurisdiction, the state against whom the judgment was given was not entitled to immunity in respect of the claim“.
The question that the foreign judgment creditor who is seeking to enforce in the UK should ask in each case is therefore, would I have been precluded by SIA 78 from suing this state had I chosen to sue in the UK? Answer in this case: no, because s.3(1)(a) would have stripped Argentina’s immunity had NML sued on the bonds (i.e. brought the adjudicatory proceedings) in the UK.
On the third issue, the Justices were also unanimous in NML’s favour. The terms of the bonds provided that “the related judgment shall be conclusive and binding upon Argentina and may be enforced in any specified court or in any other courts to the jurisdiction of which Argentina is or may be subject by a suit upon such judgment“. NML had brought a suit upon the judgment in England. It was therefore apparent, on a true construction of the bonds, that Argentina had submitted to its executory jurisdiction and had waived its right to immunity.
In summary then, champagne corks in New York, tears in Argentina, and a good outing for Jonathan Sumption before his soon-to-be colleagues. What are the messages for commercial practitioners? The moral of the story is relatively straightforward, particularly if you reverse the order of the above issues.
First, if you are an investor seeking to contract with a sovereign state, you should ensure that the wording of your agreement contains express submission to the jurisdiction(s) of your choice, both for adjudication, and for enforcement. Second, if your agreement does not provide submission in this way and you still wish to enforce a foreign judgment against the state’s assets in the UK, ask whether the state would have been immune under SIA 78 if you had sued in the UK; if not, you may be able to use the s.31 CJJA 82 route to lift immunity. Third, if those arguments fail, argue the restrictive doctrine of statutory immunity, i.e. that s.3 SIA 78 should be given a wide interpretation to permit enforcement against states of any proceedings relating to acta jure gestionis.