Are the assets of State-owned enterprises immune from the enforcement of arbitral awards?

Overview

The Privy Council’s recent decision in Botas Petroleum Pipeline Corporation v Tepe Insaat Sanayii AS [2018] UKPC 31 clarifies that State-owned enterprises (“SOEs”) cannot rely on immunity under the State Immunity Act 1978 (the “Act”) in order to resist the enforcement of arbitral awards against their assets.

Background

The case concerned Boru Hatlari Ile Petrol Tasima AS (“Botas”), a Turkish SOE dealing in crude oil and natural gas pipelines, and Tepe Insaat Sanayii AS (“Tepe”), a Turkish construction company. Botas engaged Tepe as sub-contractor to carry out works in relation to the construction and operation of an oil pipeline. Botas unlawfully terminated its contracts with Tepe.  The matter was referred to ICC arbitration and Tepe successfully obtained two arbitral awards in its favour against Botas, totalling approximately USD $100 million (the “Awards”). Botas failed in its attempts to challenge the Awards.

Tepe then sought to enforce the Awards against Botas’ shares in two Jersey-incorporated subsidiary companies (the “Shares”). The Jersey courts granted Tepe an interim arresting order (an order which is materially similar to, but wider than, a third party debt order in England) over the Shares. Botas appealed this decision, claiming that the Shares were immune from enforcement under the Act (which was extended to Jersey by the State Immunity (Jersey) Order 1985) because the Shares were beneficially owned by the Turkish State.

Botas’ appeal failed before both the Jersey Royal Court and the Court of Appeal of Jersey. It obtained permission to appeal to the Privy Council.

Botas’ arguments before the Board

Ownership vs purpose of use

Botas’ primary case was that, under section 13(2)(b) of the Act, an award can only be enforced against the ‘property of a State’ where that property is being used, or is intended to be used, for commercial purposes.

Botas submitted that, whilst the companies in which the Shares were held do operate for commercial purposes, the Shares themselves do not.  It argued that it owned the Shares for the sovereign purposes of the Turkish State, rather than for commercial purposes, and therefore they constitute State property benefitting from immunity under the Act.

The Board rejected this submission, holding that the question of whether certain assets owned by a SOE constitute State property is not to be ascertained solely by an examination of the purpose for which those assets are held.  Where a SOE has been incorporated by the State with a distinct legal personality, that necessarily precludes the SOE’s assets from being deemed State property. Otherwise, this “would effectively eliminate any difference between assets held by the State and by a separate entity” (para 10). The Board held that the starting point in determining whether State immunity applies to particular property is not whether that property is put to sovereign purposes but whether it is, in fact, property which is owned by the State.  If the asset in question is the property of the State, it is only then that the assessment of commercial purposes under section 13(4) of the Act is engaged.

Proprietary or legal interest vs control or possession

Botas’ alternative position was that, regardless of whether a State has a legal or proprietary interest in the relevant asset, if it exercises possession or sufficient control over that asset then it constitutes ‘property of a State’ for the purposes of the Act.

In developing this submission, Botas put forward, inter alia, that:

  • various other sections of the Act make provision for property in which the State has a broader interest than strict proprietary rights (see, for example, s. 6). Therefore, the phrase ‘property of a State’ should be understood as “a shorthand encapsulation of all aspects associated with property in these earlier sections of the Act” (para 12); and
  • because understandings of the concept of property differ between jurisdictions, ‘property’ should be interpreted widely to include possession and control, so as to achieve cross-border coherence.

The Board rejected this argument, holding that in order to constitute ‘property of a State’ there must be “legally ascertainable interests in the relevant asset” (para 17) and that the State must have “a proprietary interest having value against which execution can lie” (para 22).  In other words, the extent and nature of a State’s interest in the asset(s) in question must be such that the judgment creditor’s rights can be enforced against that interest under domestic law.  If concepts such as possession and control were to be taken into account, this could prejudice creditors’ abilities to enforce against State assets which are put towards commercial purposes (which is expressly provided for in the Act).

The Board also carefully analysed Botas’ submissions in reliance on wider international law concepts of property. This argument was developed on the basis of certain leading academic commentary and the United Nations Convention on Jurisdictional Immunities of States and Their Property (which was adopted by the United Nations General Assembly on 2 December 2004, but which has not yet been ratified). This was rejected by the Board, which held that the application of section 13(2)(b) turns on the “straightforward question whether the property against which enforcement is sought is property of a State” (para 27), making clear that in this context ‘property’ means that which is “recognised as such for the purposes of enforcement under domestic law” (para 17).

Comment

The Board’s rejection of a broader notion of property, based around concepts of possession and/or control, is likely to be regarded as welcome news by common law lawyers and their clients. It is difficult in practice to see how, were this test to apply, contracting parties could garner a transparent and accurate assessment of behind the scenes control of particular assets so as to meaningfully assess enforcement risk at the time a transaction is being considered and entered into.

The decision has potentially important implications for clients contracting with States and SOEs. The decision makes clear that the Court will conduct a fact-sensitive analysis in considering whether the property of a SOE is in fact State property. It puts into focus the need for such clients to front foot their analysis, at the due diligence and project scoping stage, of potentially quite complicated and commercially (or even politically) sensitive matters with their counterparties, including where, how and by whom particular assets are held and owned.

Finally, the decision also serves as a timely reminder for parties to consider enforcement-related issues at the outset of their commercial engagement (especially when contracting with States and/or SOEs). In particular: (a) parties should be advised on, and give due consideration to, contractual provisions relating to, for example, choice of law, jurisdiction, consent to enforcement and execution of orders or awards and also provisions regarding interim relief; and (b) given the serious implications that State immunity could have on any potential claims, parties contracting with entities that are closely associated with a State would do well to ensure that any such claims to immunity are expressly and unequivocally waived at the outset.

Jake Calvert, Associate and Liam McNeely, Senior Associate at Cooke, Young & Keidan LLP

 

 

 

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