Indirect ownership of shares not sufficient grounds for state immunity claim, rules Jersey court

Out-Law News | 17 Feb 2016 | 2:33 pm | 3 min. read

An indirectly-owned state entity cannot argue that its shares are covered by state immunity laws, and therefore cannot be used to satisfy an arbitration award, a court in Jersey has ruled .

If Jersey’s Royal Court had decided that state immunity should apply to the shares, the decision would have had serious implications for international companies doing business with state-owned companies, particularly in the infrastructure and energy sectors, according to a team at Pinsent Masons, the law firm behind Out-Law.com, which acted for the successful company in this case.

“This is the first time that a Jersey, or English, court has considered whether state immunity may attach to the shares of an entity in which a state has an indirect interest under article 6(4) of the State Immunity Act,” said international arbitration expert Mark Roe of Pinsent Masons.

“If a ‘general’ interest in or indirect level of control over these shares by the Republic of Turkey in this case was sufficient to invoke state immunity, this would open the doors to immunity claims in respect of any assets of any entity in which a state has some form of interest or control, however 'general' or indirect. This would be entirely at odds with the underlying rationale of the restrictive immunity reflected in the State Immunity Act,” he said.

State immunity laws give states certain protections against being sued in the courts of another state.

Tepe, a construction company based in Turkey, had entered into two contracts with crude oil transportation company Botas to assist in the construction of the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline. The dispute arose when Botas, which is wholly owned by the Republic of Turkey, terminated those contracts.

The disputes were referred to separate arbitral proceedings seated in Paris under the rules of the International Chamber of Commerce (ICC), as provided for in the contracts. Both arbitral tribunals found that Botas’ contractual terminations were unlawful and made a number of awards in favour of Tepe worth, in aggregate, approximately $96 million. Botas unsuccessfully appealed some of the arbitration awards to the French courts, and failed to make any payments under any of the awards even after exhausting all avenues of appeal.

Botas has two Jersey subsidiary companies, Turkish Petroleum International Company Ltd (TPIC) and Botas International Ltd (BIL). As, under Jersey law, an arbitration award can be enforced as if it is a judgment of the Jersey courts, Tepe had Botas’ shares in each of these companies arrested in order to satisfy the awards. The arrest was initially made on an interim basis, and Botas objected to confirmation of the arrests on the grounds that the Republic of Turkey has an interest in and/or control over the shares sufficient to engage state immunity.

At the Jersey Royal Court, Botas contended that the law on state immunity prevented courts from enforcing against assets in which a state has sufficient interest of control unless those assets were held for commercial purposes.Tepe argued that state immunity did not apply in this case as Turkey did not have a legal or beneficial interest in the shares of the Jersey companies. The court found that the day to day control over the shares rested with Botas, the legal and beneficial owner of the shares, and held that the nature and level of the Republic's control and interest, even accepting that all of Botas' contentions in this respect were correct, which was disputed, was not sufficient to engage state immunity under the State Immunity Act.

In its judgment, the Royal Court noted that if Botas’ arguments were successful, a state would be able to claim immunity over the shares in virtually any indirectly owned subsidiary. Referring to a 2012 Privy Council decision, it said that the assets of a separate legal entity which is wholly owned by a state are separate to the assets of the state itself and not, therefore, immune.

For this reason, the fact that the Republic of Turkey could direct Botas to dispose of assets such as the shares at any time was beside the point. If that was sufficient, then Turkey would be able to claim immunity over any assets belonging to Botas, but it was accepted that it did not claim such immunity, the court said.

Pinsent Masons, the law firm behind Out-Law.com, acted for the successful party in this case alongside Collas Crill in Jersey and Göksu law in Turkey.