One of the main exceptions to the doctrine of restrictive state/sovereign immunity is the so-called commercial activity viagra genericle=”shaun_lee_ph” src=”×150.jpg” alt=”” width=”150″ height=”150″ />exception. According to this exception, the state’s immunity to the jurisdiction of the courts does not apply when the activity in issue is a commercial one. This commercial exception also applies to attachment proceedings against state property.

A recent decision of the UK Supreme Court on the construction of the expression “property which is for the time being in use or intended for use for commercial purposes” per the UK State Immunity Act 1978, s 13(4) is helpful in determining the approach of the English courts in determining whether state property is or is not intended for use for commercial purposes. In particular, this case illustrates the English courts’ approach of giving deference to the stated intended use of such property by the state in question and discounting the relevance of the origins of such property. In SerVaas Incorporated v Rafidian Bank & Ors [2012] UKSC 40, the appellant/claimant, SerVaas Inc, had sought enforcement of a Third Party Debt Order against the debts payable by the respondent, Rafidain Bank, to the state of Iraq. The Third Party Debt Order arose out of a 1988 contract under which SerVaas had agreed to supply the Iraqi Ministry of Industry with equipment, machinery and related services for the purposes of commissioning a state owned copper and brass processing factory in Iraq.

However, as a result of the Iraqi invasion, SerVaas terminated the contract and obtained default judgment from the Paris Commercial Courts for the remaining amounts due to it under the contract. At the same time, pursuant to a UN resolution arising out of the Iraqi invasion (and unrelated to the SerVaas judgment), the assets of Rafidain Bank in London were frozen and the bank was placed under provisional liquidation pursuant to a petition by the Bank of England.

Eventually the new Iraqi regime purchased and obtained an assignment of the debts of the creditors of Rafidain and became entitled to the Rafidain Bank’s assets in London. There followed a scheme of arrangement for the distribution of assets held by the Provisional Liquidators to Rafidain’s creditors as approved by the English court. Under the scheme of arrangement, it was intended and accepted by all parties that the sums to be paid out to Iraq were to be transferred to the so-called Development Fund for Iraq (“DFI”), a UN established fund following the fall of Saddam Hussein.

SerVaas proceeded to register its judgment with the English courts for the amounts that were still unsatisfied. It then successfully applied for a lifting of the stay of proceedings against Rafidain Bank and enjoined Rafidain, the Provisional Liquidators and the Scheme Administrators, inter alia, from making any payment to Iraq pursuant to the scheme.

However, when it applied summarily for a Third Party Debt Order against Rafidain and for the continuation of the injunctions, Iraq opposed the application and argued that the application ought to be dismissed because of state immunity and, in particular, that the sums to be paid to Iraq by Rafidain were not to be used, or intended to be used, for a commercial purpose.

Significantly, the Chargé d’Affaires and Head of Mission of the Embassy of Iraq in London signed a certificate in the following terms:

“1. The Admitted Scheme Claims of Iraq under the Scheme [of arrangement in respect of Rafidain] have never been used, are not in use, and are not intended for use, by or on behalf of the State of Iraq for any commercial purpose.

2. Any assets or distributions received in respect of any Admitted Scheme Claim of Iraq under the Scheme are not intended for use by or on behalf of the State of Iraq for any commercial purpose.

3. The State of Iraq has directed the Scheme Administrators, and intends to continue to so direct the Scheme Administrators, to transfer any assets or distributions in respect of any Admitted Scheme Claim of Iraq under the Scheme to the Development Fund for Iraq.”

The English High Court agreed and its decision was upheld by a split decision of the English Court of Appeal. The appeal to the UK Supreme Court was similarly dismissed.

The Supreme Court considered that the sole issue was “the scope of [Iraq’s] immunity from execution of judgment given against it, which is governed by section 13(2)(b) and 13(4) [of the UK State Immunity Act]“. Critically, s 13(5) provides that,

“(5) The head of a State’s diplomatic mission in the United Kingdom, or the person for the time being performing his functions, shall be deemed to have authority to give on behalf of the State any such consent as is mentioned in subsection (3) above and, for the purposes of subsection (4) above, his 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 shall be accepted as sufficient evidence of that fact unless the contrary is proved.”

The Supreme Court noted that the proceedings before it were summary proceedings and therefore the issue that needed to be addressed was “whether there [was] any real prospect of SerVaas rebutting the presumption created by the Certificate [that the property in question] was not for the time being in use for commercial purposes within the meaning of section 13(4) of [the UK State Immunity] Act“.

The dispute between the parties (and in the Court of Appeal below) was whether the origins of the payout by Rafidain to Iraq were relevant to the consideration of s 13(4). SerVaas argued that that the nature of the transaction which gave rise to Rafidain’s liability was entirely commercial. In other words, the origins of the debts which gave rise to Iraq’s payout were commercial and not sovereign in nature.

Furthermore, SerVaas argued that the debts owed by Rafidain bank to Iraq and the right to a payout thereon were properly described as in use, in order either to obtain payment or to complete the underlying commercial transactions giving rise to the claim or alternatively as part of the transaction pursuant to which Iraq acquired the debts, the nature of which was not a sovereign act.

There was also an issue as to the reason behind Iraq’s purchase of the debts. SerVaas argued that Iraq did so in order to make a profit and as part of a commercial venture. On the other hand, Iraq stated that it purchased the debts in the exercise of sovereign authority as part of a huge restructuring of debts incurred by the previous regime.

The Supreme Court dismissed those arguments. It held that the origins of the property were not relevant to the consideration of whether property was “in use for commercial purpose” on the basis of the language of s 13(4) as well as case law.

Language of the UK State Immunity Act

In respect of the former, the Supreme Court held that “the expression ‘in use for commercial purposes’ should be given its ordinary and natural meaning having regard to its context“. The Supreme Court reasoned that “it would not be an ordinary use of language to say that a debt arising from a transaction is ‘in use’ for that transaction. Parliament did not intend a retrospective analysis of all the circumstances which gave rise to property, but an assessment of the use to which the state had chosen to put the property“.

In this regard, the Supreme Court pointed out that in line with provisions in other parts of the UK State Immunity Act, if the UK parliament had wanted to, it could have expanded the scope of the commercial activity exception. For example. the UK State Immunity Act could have provided for execution against “property that ‘related to’ a commercial transaction, or arose ‘in connection with’ a commercial transaction” as opposed to property that was “in use”.

English Case Law

The Supreme Court cited extensively from Alcom Ltd v Republic of Columbia [1984] AC 580, a case in which the applicants had sought to execute against monies held in a bank account used to meet the daily operational expenses of Colombia’s diplomatic mission. In that case, the House of Lords considered that the monies did not fall within the commercial exception. The Supreme Court considered that the crucial proposition is the necessity to show that the monies had been specified for commercial purposes i.e. “the judgment creditor must show that the bank account was earmarked by the state solely for being drawn down to settle liability incurred in commercial transactions“. The Supreme Court agreed with the High Court judge that this case did not suggest that “if the moneys in the bank account resulted from commercial transactions, that might be relevant to the question whether the account was used or intended for use for commercial purposes“.

The Court also noted three English High Court cases which took a similar approach and focused on present or future use of the property (including a debt owed to the judgment debtor) . The Supreme Court specifically rejected any attempted distinction between the current use of a debt and the current use of a bank account and held that “[i]n each case the question is the same, namely whether the relevant property is in use or is intended for use for commercial purposes“.

US Case Law

The Supreme Court also considered US case law on the basis that state immunity is governed by the Foreign Sovereign Immunities Act 1976, which was “a leading precursor of the [UK State Immunity] Act” and in particular §1610(a) which allows courts to execute against “property in the United States…used for a commercial activity in the United States“.

The Court held that the US decisions are “strong persuasive authority” for the proposition that the language in the relevant provisions under the UK and US statutes should be construed narrowly. The phrase “used for” or “use in” are not to be construed more broadly in the sense of “related to” or “in connection with” or “connected with” as in the other parts of the relevant acts.

Hong Kong Case Law

Finally, the Supreme Court referred to the Hong Kong Court of Appeal’s decision in FG Hemisphere Associates LLC v Democratic Republic of Congo [2010] HKCA 19, where the majority two judges applying the doctrine of restrictive state immunity (as opposed to the minority which applied the doctrine of absolute state immunity which did not have a commercial activity exception) came to a similar position. The majority of the Hong Kong Court of Appeal held that “the question was whether the property was to be put to use for a private or commercial purpose“.

Decision of the Supreme Court

On the basis of the foregoing, the Supreme Court decided that SerVaas’ application could not succeed. There was nothing put before the court by SerVaas to rebut the presumption of the Certificate. SerVaas could not show that “the debt is or was earmarked (or in use) for being drawn down upon in order to satisfy commercial liabilities“. It was accepted by SerVaas that the payout on the debt was to be transmitted to the DFI “which is manifestly not a commercial purpose“.

The Supreme Court also held that drawing a distinction between the debts (the source of the payout) and the payout itself was “artificial and highly technical” and that the debts were “simply the means to the ends of the [payout]. They [were] nothing more than a legal mechanism by which Iraq’s entitlement to receive the [payout] [was] secured and given effect to“. Furthermore, neither the debts nor the payout were “connected to, or destined for use in, any mercantile or profit-making activity by Iraq“.

An Asian Perspective

There are special considerations that apply when parties deal with a state or state owned enterprise because of issues of state/sovereign immunity. It is clear that parties will need to take into account the jurisdictions where enforcement of any arbitral award is likely.

In Asia, the issue of state immunity is particularly relevant given the prevalence of state owned enterprises, government linked entities and sovereign wealth funds. S 15(4) of the Singapore State Immunity Act (Cap 313) is identical to s 13(4) of the UK State Immunity Act, and so the UK Supreme Court decision in SerVaas is likely to be given much credence should the issue arise before the Singapore courts.

For more information on the issue of enforcing arbitral awards against states and state owned companies in Asia, see blog articles Acts of State and Immunities and State Immunity and State Owned Enterprises on Olswang’s Singapore International Arbitration blog.