Aidan Partners

Arbitration: The Defence of State Immunity

Friday 17th June 2016

The Defence of State Immunity in Arbitration - A Myth?
Re Avionics Case

By Akin Omisade, FCIArb (UK)
Senior Partner, Aidan Partners


It has long been the reasonable expectation of a successful party to an arbitration to expect the losing party to perform the award timeously, as that is one of the reasons why parties choose arbitration as a means of resolving disputes. It is an implied term of every arbitration agreement that parties will carry out the award. Generally, this implied term is reflected in certain international rules of arbitration such as the United Nations Commission on International Trade Law ("UNCITRAL") rules which states in its Article 32(2) that the award "shall be final and binding on the parties" and that "the parties undertake to carry out the award without delay".

Parties to an arbitration do raise defences against the arbitral process from commencement stage through to enforcement and recognition of the award where it is an international arbitration. Where one of the parties to the arbitration is a Sovereign State, a defence that is usually raised is that of State immunity. The defence of State immunity can be raised during the course of the arbitration against the jurisdiction of the Tribunal or post the arbitration process, when the successful party seeks to enforce the award. However, it is generally accepted that once a State has entered into an arbitration agreement, that State has waived its immunity regarding jurisdiction. Even though, it is argued by many practitioners that where a State has entered into an arbitration agreement and consequently waived immunity against jurisdiction, the position of immunity against enforcement is less than certain and the terrain can be said to be laden with mines that could make enforcement a laborious and at times, a fruitless exercise for the successful party. There are no established rules determining when a State can raise the defence of State immunity against enforcement.

It is usual during an international arbitration to think about the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("the New York Convention") as a foundation to build the enforcement of an arbitral award against a State on, but regrettably, even though a State might be a signatory to the New York Convention, that fact of being a signatory does not operate as a waiver against the defence of State immunity.

As inappropriate as it is for a State to seek to avoid its legal obligations by claiming immunity, States have successfully raised the defence of immunity in several cases. If a State can successfully raise the defence of State immunity against enforcement, how then can a successful party to an arbitration enjoy the fruits of its award? This is the dilemma that contracting parties have faced over the years and which, for many African countries, such as Nigeria, has adversely affected partnership with governments in the growth of economies as well as Arbitration. In the recent decision of LR Avionics Technologies Limited v The Federal Republic of Nigeria [2016] EWHC 1761 (Comm) ("Avionics case"), the challenges which a successful party in an international arbitration encounters when seeking to enforce an award against a State was again highlighted.
The Avionics case of the High Court sitting in London involved the Federal Republic of Nigeria ("Nigeria"), and the defence of State immunity was examined under the provisions of the State Immunity Act 1978 of the United Kingdom. The facts of the Avionics case can be summarised as follows: the Claimant obtained an arbitration award against Nigeria and also subsequently obtained a judgement from the Federal High Court (in Nigeria itself) ordering the Nigerian Government to pay the sums awarded in the arbitration. The Federal Government of Nigeria did not comply with either the award or the judgement and as a consequence of the failure to comply, Avionics sought to enforce the award and judgement in England against a freehold property owned by Nigeria located on the famous Fleet Street in London. The Federal Government of Nigeria had granted a lease of the property to a private company, Online Integrated Solutions Limited ("OIS") to which it had outsourced the processing of its visa and passport applications. The private company, on behalf of Nigerian banks, was also registering customers for the Bank Verification Number exercise. OIS was known to charge fees for these services it was providing for Nigerian banks. The Federal Government of Nigeria did not participate in the application for the recognition and enforcement of the foreign judgement and neither did it acknowledge any of the court processes until the final charging order obtained by Avionics against the Fleet Street property was to be enforced. The Federal Government of Nigeria applied to set aside the charging order and in granting the application, the Court held that the Fleet Street property was immune from execution under the provisions of the State Immunity Act 1978.

Four issues fell for determination by the Court in arriving at its decision:

1. Whether the award can be enforced against the Federal Government of Nigeria;
2. Whether the judgement of the Federal High Court of Nigeria can be enforced;
3. Whether the Fleet Street property was in use for commercial purposes and consequently immune from enforcement; and
4. Whether the Fleet Street property formed part of the Nigerian diplomatic mission.

In addressing the issues, the Court decided that the award could be enforced against the Federal Government of Nigeria by the Claimant by virtue of the joint reading of the provisions of Section 9 of the State Immunity Act 1978 and Section 101 of the Arbitration Act 1996. For ease of reference Section 9 of the State Immunity Act 1978 states that "(1) Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration. (2)This section has effect subject to any contrary provision in the arbitration agreement and does not apply to any arbitration agreement between States".

Section 101 Arbitration Act 1996 provides that (1)A New York Convention award shall be recognised as binding on the persons as between whom it was made, and may accordingly be relied on by those persons by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland.
(2)A New York Convention award may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect. As to the meaning of "the court" see section 105.
(3)Where leave is so given, judgment may be entered in terms of the award.

In respect of the judgement of the Federal High Court, it held further that if at all the judgement could be enforced, it would be under Section 9 of the Administration of Justice Act 1920 and not under the Arbitration Act 1996.

In spite of the foregoing, the crucial issue that fell for determination was to what use the Fleet Street property was being put. The Acting Nigerian High Commissioner had issued a certificate under Section 13(5) State Immunity Act 1978 certifying that the property "is part of the Nigeria High Commission of the Federal Republic of Nigeria in the United Kingdom and it is in use for consular activities". Section 13(5) states that "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" . In order for Avionics to succeed, it had to prove that the Fleet Street property was in use for commercial purposes. Avionics did not succeed in convincing the Court that the property was being used for commercial purposes as the Court observed that even though the activities of OIS, within the property, was commercial in nature, it was carrying out consular activities on behalf of the Nigeria High Commission and as such, the property was immune from enforcement under the State Immunity Act 1978.

Conclusion:

This latest decision of the High Court sitting in London is another addition to a line of decisions which confirms that the enforcement of an award can be defeated by the defence of State immunity whilst also confirming that the foreign judgement of a competent court can be enforced where the judgement has been delivered pursuant to an arbitral award.

As encouraging as the decision of the Court is for a State desirous of avoiding its obligations under an Arbitration agreement, it highlights the false victory a party to an arbitration might enjoy if the award cannot be enforced against a State's property, where the property has been designated as one not for commercial purposes. When will a property or asset of the State be for commercial purposes? In this case, even though there were strong arguments put forward by Avionics linking the lease of the property to a private company carrying out other functions aside of the contracted consular and passport services, the Court was not convinced.

It is submitted that the Court interpreted commercial purposes narrowly in that:

a. The Federal Government of Nigeria was reportedly receiving commercial rental income in the sum of £150, 000 annually from OIS. The receipt of rent in itself is evidence that the property was being put to commercial use; and
b. OIS was not exclusively carrying out consular and passport services on behalf of the Federal Government of Nigeria, it was carrying out other services for Nigerian commercial banks for a fee.

The decision of the Court raises grave implications for a successful party in an arbitration that seeks to enforce the award against a contracting State (to the New York Convention) especially where the subject of enforcement is claimed not to be for commercial purpose. It appears that in the United Kingdom, the mere issuance of a certifying certificate by an Ambassador or High Commissioner of a State certifying that a property is not for commercial use is sufficient to free the property from execution. Contracting parties will be well advised to ensure that a clear and well defined waiver clause is included in Agreements for execution against State property consequently doing away with the commercial purpose exception.

The case highlights the likelihood of forum shopping by a successful party to arbitration. Contracting parties to agreements with States are advised to ascertain jurisdictions where the State has assets which are classified purely as commercial assets and have this listed in the Agreements as assets against which potential awards can be enforced. This should serve as a deterrent to States that might seek to avoid their obligations under the Arbitration and consequently give confidence to the other contracting party to progress the agreement.

In addition, in the face of the obvious absence of direct provisions in the New York Convention in respect of State immunity, commercial lawyers drafting arbitration agreements will serve their clients better by incorporating into the agreements, countries that do not give as much consideration for State immunity as seen in Section 13(5) of the State Immunity Act, as countries were the successful party can execute the award against the State, if need be.