Sovereign immunity: assets of state-owned entities not immune from enforcement

Out-Law News | 24 Oct 2018 | 3:07 pm | 5 min. read

Sovereign immunity does not extend to the property of entities which are owned by states, the Privy Council has ruled. The ruling reinforces that English law recognises states and the entities they incorporate as having separate legal personality.

The judgment, issued on Monday, has far-reaching implications for states, state-owned entities (SOEs) and those who contract with them, said international arbitration expert Mark Roe of Pinsent Masons, the law firm behind Out-Law.com.

Sovereign immunity laws give states certain protections against being sued in the courts of another state, as well as protections from their assets being enforced against to satisfy judgment debts.

The ruling of the Privy Council came in a case involving a dispute between Tepe, a construction company based in Turkey, and crude oil transportation company Botaş, with which Tepe had entered into two contracts for the construction of the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline. Disputes arose when Botaş, which is wholly owned by the Republic of Turkey, terminated those contracts.

Those 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 Botaş’ contractual terminations were unlawful and made a number of awards in favour of Tepe worth, in aggregate, approximately $96 million. Botaş 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.

Botaş has two Jersey subsidiary companies, Turkish Petroleum International Company Ltd (TPIC) and Botaş 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 Botaş’ shares in each of these companies arrested in order to satisfy the awards. The arrest was initially made on an interim basis, and Botaş 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 sovereign immunity.

In 2016, Jersey’s Royal Court ruled that a SOE cannot assert sovereign immunity over assets it owns, and therefore such assets can be used to satisfy an arbitration award. Botaş's attempt to appeal in Jersey failed, but Botaş obtained leave to appeal from the Privy Council.

Botaş maintained before the Privy Council first that the shares were the “property” of the Turkish State because, although not legally or beneficially owned by the Turkish State, the shares were not used or intended for use for commercial purposes, and therefore were used for sovereign purposes and immune from execution. It was also argued by Botaş that the extent of the control exercised by the Turkish State over the shares meant that they were, for the purposes of the State Immunity Act (SIA), to be treated as the property of the Turkish State.

The Privy Council rejected both of Botaş' arguments.

The Privy Council first held that, if it were to ascertain whether assets were the property of a state by reference to the underlying purpose for which they were held, that would "tend to undermine the evident purpose behind the establishment of separate entities by states". The distinction between an SOE and its assets on the one hand, and the state on the other, is an important aspect of the SOE's ability to conduct business.

The Privy Council considered that to determine entitlement to state immunity by reference to whether assets were being used for commercial or sovereign purposes, without first considering whether the assets were owned by the SOE or the state, "would effectively eliminate any difference between assets held by the state and by a separate entity".

Botaş’s secondary argument – that the concept of 'property of the state' should be wide enough to encompass situations where the state has no proprietary interest, but has possession or exercises some sort of control over the assets – was also dismissed. In doing so, the Privy Council held that the nature of ‘ownership’ of property under the relevant provision of the SIA must be of a quality against which a judgment creditor’s rights can be enforced. As it would not be possible to enforce against a state’s ability to control assets, this cannot be used to define whether or not an asset is the 'property of the state', it said. 

The Privy Council also noted that the SIA specifically provides that where a state had actual possession of property, a court cannot order the state to deliver that property to a third party. In such circumstances notions of property were irrelevant, it said. 

The Privy Council also held that the question of what constitutes ‘property’ is necessarily a question for the jurisdiction in which enforcement – here, of arbitral awards – has been sought. It therefore rejected Botaş’ argument that an autonomous international concept of ‘property’ should be applied which could include notions of possession and control.

The Privy Council’s decision has "important repercussions for companies which do business with states and SOEs", Mark Roe of Pinsent Masons said. Pinsent Masons acted for Tepe in the case, as well as the underlying arbitrations.

Roe said: "The Privy Council has brought some welcome clarity to the circumstances in which state immunity can be invoked in the English courts."

"First, the decision makes it very clear that assets owned by a SOE are the property of that SOE, and not property of the state. This may be good news for those contracting with SOEs because they can be confident that the assets of the SOE – at least those in the UK – are available for enforcement. Conversely this may be bad news for those who seek to enforce against states: the assets of an SOE are not available to satisfy the state's debts."

Roe said that the decision highlights the importance for businesses to establish at the outset who they are contracting with.

"The Privy Council has reaffirmed other recent English court decisions that even those SOEs which are subject to very extensive state control retain separate legal personality, even if they appear little more than a mere cypher," Roe said. "In these circumstances you would have no recourse against the assets of the state if it's actually the SOE you've contracted with."

The decision may also encourage states to place their assets in SOEs, he said.

"States can confidently place their assets in the ownership of separate entities which they own and are able to exercise a high degree of control over, safe in the knowledge that they are not available for enforcement by a third party which is seeking to enforce a judgment or award against the state," Roe said.

"If corporates contract with the state or a state agency such as the Ministry of Public Works in jurisdictions where there is doubt as to the state's ability or willingness to honour its debts then steps should be taken up front to obtain other forms of security. In such circumstances corporates should consider seeking a waiver of the state's right to claim sovereign immunity as to both adjudication and enforcement. This would give them the option of pursuing legal action, the threat of which may offer sufficient leverage," Roe said.

According to Roe, the "real mischief" will continue to arise where SOEs engage in activities that should properly be undertaken by the state, such as defence activities, and where the state engages in activities that are more appropriately undertaken by private corporations, for example in operating oil companies.